U.S. underlying inflation rose more than expected in August, giving the Federal Reserve fresh evidence of persistent price pressures just days before officials meet to decide whether to raise interest rates as an energy shock from the Middle East pushes oil prices above $100 a barrel.
The core consumer-price index, which excludes volatile food and energy categories, increased 0.3% from July, exceeding economists' 0.2% forecast. Core prices were up 2.4% from a year earlier, according to Labor Department data released Friday.
Headline CPI climbed 0.4% in August and 3.4% from a year earlier, both matching economists' expectations. Gasoline prices rebounded after falling during the previous two months, contributing to the monthly increase as disruptions from the U.S.-Iran conflict continued to affect global energy markets.
"Indexes that increased over the month include communication, lodging away from home, airline fares, education, and used cars and trucks. Conversely, the index for medical care and the index for motor vehicle insurance were among the major indexes that decreased in August," the Bureau of Labor Statistics said.
The report is the final CPI reading Federal Reserve officials will receive before their Sept. 15-16 policy meeting. The federal-funds rate is currently in a range of 3.50% to 3.75%, and investors have sharply increased expectations that policymakers could resume raising borrowing costs.
Market pricing has shifted rapidly as inflation data and higher energy prices have accumulated. Reuters reported Friday that federal-funds futures were pricing roughly a 70% probability of a quarter-percentage-point increase next week, up substantially from expectations earlier in the month.
The decision remains unusually uncertain. A Reuters survey conducted before Friday's CPI report found that a majority of economists expected the Fed to leave rates unchanged for the rest of 2026, although a growing minority anticipated at least one increase before year-end.
The inflation report arrives as American households are becoming more cautious about their finances. The Federal Reserve Bank of New York's August Survey of Consumer Expectations found that 32.6% of respondents expected their financial situation to be somewhat or much worse a year from now, up from 30.3% in July.
Consumers also expected spending to grow substantially faster than income. Median expected household income growth remained at 3% in August, while expected spending growth increased 0.3 percentage point to 5.2%, above its 12-month trailing average of 5%.
Longer-term inflation expectations showed less movement. Median expectations remained at 3.6% over the one-year horizon and 3% over five years, while the three-year expectation declined 0.1 percentage point to 3.2%.
Credit expectations deteriorated as well. The New York Fed said more households reported that obtaining credit had become difficult and a larger share expected credit availability to worsen over the coming year. The perceived probability of missing a minimum debt payment during the next three months rose 1.2 percentage points to 13.2%.
The Federal Reserve isn't the only major central bank confronting renewed inflation pressure. The European Central Bank on Thursday raised its three key interest rates by 25 basis points, lifting its deposit rate to 2.5%, and explicitly cited the Middle East conflict as a source of persistent inflation.
The ECB said its decision "underscores the Governing Council's commitment to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term." It now projects headline inflation averaging 3% in 2026, 2.5% in 2027 and 2.1% in 2028.
Underlying inflation in Europe is expected to prove more persistent. "The baseline foresees 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028. Compared with June, the baseline projection for inflation in 2026 is unchanged, while it has been revised up for 2027 and 2028," the ECB said.
Energy remains the central uncertainty in that outlook. The ECB expects headline inflation to reach 3.6% in the fourth quarter before declining during 2027, while higher energy costs gradually filter into food and non-energy prices.
"In relation to the energy shock, the updated scenarios put together by staff illustrate the broad range of outcomes for how growth and inflation would evolve under different assumptions about its intensity and duration, as well as its indirect and second-round effects," the ECB said.
