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U.S. consumer inflation held steady at 3.4% in August, keeping pressure on the Federal Reserve as high prices linked to the Iran war and other factors fuel questions about whether policymakers will raise interest rates.
The consumer price index (CPI) rose 0.4% from the previous month, matching analyst expectations, according to data released Friday by the U.S. Bureau of Labor Statistics. Markets now put the probability of a Fed rate hike next week at about 90%, up from roughly 70% before the inflation report.
Gasoline prices surged 3.9% in August, accounting for more than one-third of the total monthly increase in consumer prices. The energy index rose 2.1% during the month after falling 1.5% in July, taking its annual increase to 16.3%.
Gasoline prices are up 44% since the start of the Iran war in February, according to data from the American Automobile Association (AAA).
The increase in energy costs came as the conflict continued to put pressure on global energy markets. U.S. diesel prices hit an unprecedented $6 per gallon on Friday, adding to costs for transportation, farming and construction.
Core consumer prices, which exclude volatile food and energy items, rose 0.3% in August after increasing 0.2% in July. On an annual basis, core inflation slowed slightly to 2.4% from 2.5% in July.
Food prices edged up 0.1% over the month and increased 2.7% from a year earlier. Shelter costs rose 0.3% in August, while indexes for communication, lodging away from home and airline fares also posted monthly gains.
The latest reading leaves inflation well above the Fed's long-term 2% target, even after prices eased sharply from the 9.1% peak reached during the pandemic. The Federal Open Market Committee is due to meet Sept. 15-16, with its interest-rate decision scheduled for Sept. 16. The Fed currently holds its federal funds target range at 3.50%-3.75%.
Several Fed policymakers have signaled that the August inflation data could determine whether they support a rate increase. Fed Governor Christopher Waller said last week that he would favor keeping rates unchanged if incoming data showed that recent signs of disinflation were continuing, but added that a hike could be appropriate if the August figures showed that improvement had been temporary.
The latest figures give policymakers less evidence of broad price cooling, while the sharp rise in gasoline costs adds another source of inflation pressure. Markets have responded by sharply increasing the odds of a September hike, with interest-rate futures putting the probability at about 87% on Friday.
The Fed last raised rates three years ago, ending a tightening cycle that began during the pandemic as inflation surged.
It has gradually lowered rates since 2024 but has kept them between 3.50% and 3.75% this year as inflation has remained above target, while the effects of the Middle East conflict and Trump's tariff policies have filtered through the economy.
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