The final major economic indicator before the Federal Reserve's policy meeting has landed, and it arrives as American motorists face record fuel prices. The Bureau of Labor Statistics reported on Friday that annual consumer price inflation held at 3.4% in August, matching July's figure and consensus forecasts. Core inflation, which excludes volatile food and energy components, eased to 2.4% from 2.5%.
Yet the monthly numbers tell a more concerning story. Prices climbed 0.4% in August, a fourfold acceleration from July's 0.1% rise and the fastest monthly pace in three months. The annual rate remained flat only because it is measured against the strong summer of 2025.
Fed decision looms
Markets had largely priced in a quarter-point rate increase before the data release. According to CME's FedWatch tool, the probability of a hike at the 16 September meeting stood at 67.4%, up sharply from around 40% before Chairman Kevin Warsh's Jackson Hole address in late August. After Friday's inflation figures, that probability jumped to 91.6%.
Warsh's first keynote as Fed chair marked a turning point. He argued that the American economy had strengthened rather than weakened, that the labour market was consistent with full employment, and that he "would be hard pressed to describe broad financial conditions as restrictive." On inflation, he was blunt: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."
Friday's data offers a mixed picture against that test. Core inflation has now fallen for a second consecutive month and sits within half a percentage point of the Fed's 2% target — a sign that underlying pressures are easing. But the monthly acceleration points in the opposite direction.
Warsh has also rejected forward guidance as a practice that "has overstayed its welcome," refusing to pre-commit to any specific trigger for action. The Fed has held its benchmark rate at 3.50% to 3.75% since December, though three regional presidents dissented in July in favour of an increase — the most in one direction since 2016.
Energy shock intensifies
The immediate pressure is coming from energy, and it is intensifying. US crude futures topped $100 a barrel this week as fighting between American and Iranian forces escalated around the Strait of Hormuz, with Washington striking five Iranian tankers after attempted missile attacks on a US Navy warship.
Diesel is where the pain is most acute. The US national average price crossed $6 a gallon on Friday for the first time in history, according to the American Automobile Association, leaving truckers and farmers paying roughly 63% more than a year ago. In California, the average is close to $8. Petrol averages $4.22 nationwide, up from $2.98 before the war began.
Ukraine's strikes on Russian refineries prompted Moscow to ban diesel exports, removing roughly 800,000 barrels a day from global supply, while disruption around Hormuz has cost another 1.2 million barrels. Refineries representing about 5 million barrels a day of capacity have been shut by the two wars, and close to 8% of global diesel supply is currently disrupted.
Some retailers have already added delivery surcharges, and the effect on grocery prices tends to arrive with a lag, meaning the energy shock in Friday's numbers may not yet be fully reflected. For European readers, the parallels are striking: European bond yields have neared crisis-era highs as Middle East tensions stoke similar inflation fears, and the ECB has already raised its deposit rate to 2.5% in response to energy-driven inflation. The Fed's decision next week will be watched closely on both sides of the Atlantic.
