Kiplinger Inflation Outlook: Stubborn Inflation Puts a September Interest Rate Hike on the Table
The 3.4% inflation rate in August was not the improvement that policymakers at the Federal Reserve were looking for.
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Inflation in August returned to an uncomfortably high rate of 0.4% from the prior month, or 3.4% over the past 12 months, after a 0.1% monthly increase in July. Higher gasoline and fuel oil costs added to the pickup, the price index’s large shelter component rose by 0.3%, and a slight pickup of 0.3% in nonshelter services costs also contributed. Among the last category, airfares rose by 2.7% because of the climb in fuel costs, and have risen 23.4% over the past year. The price of wireless phone service jumped 5.9% from a month earlier, though it was up only 3.2% over the past year. The cost of medical care actually declined by 0.2%, though it remains a moderate 2.5% higher than a year ago.
Food costs rose just 0.1%, though the cost of eating out rose 0.3%, continuing a long string of moderate increases every month. The price of new and used vehicles increased a bit more than usual, though they remained similar to what they were a year ago.
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Headline inflation will likely end the year at 4.0%, and “core” inflation, which excludes food and energy, will finish the year at 2.7%, up from 2.5% now. Partly, this is because inflation improved at the end of 2025, so the comparison to this year will be unfavorable. But it is also because the price of energy is likely to remain high with the situation in the Middle East unresolved. With the average price of diesel now above $6 per gallon, and higher still in some states, this cost will begin to filter into goods prices, giving a small boost to overall inflation. Food prices may come under new pressure at some point in the future, as one-third of the world’s fertilizer is produced in the Persian Gulf region.
The August inflation report increases the likelihood that the Federal Reserve will raise short-term interest rates by a quarter-point at its next policy meeting, on September 16, given that current inflation trends threaten to continue. The measure of inflation that the Fed watches more than the Consumer Price Index is the Personal Consumer Expenditures index excluding food and energy, which came in at 3.3% for July, the same as in June (August data will be released on September 30). The Fed wants core PCE inflation at 2%. It was already well above its benchmark before the Iran war caused energy prices to spike.
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