U.S. inflation stayed stubbornly high in August, bolstering the case for the Federal Reserve to raise interest rates at its meeting next week.
The Consumer Price Index report, released on Friday, showed overall inflation remained elevated at an annual pace of 3.4 percent, after a 0.4 percent rise from July. “Core” inflation, which strips out volatile food and energy items, rose 0.3 percent in August, or 2.4 percent from a year earlier.
The data is factoring heavily into the Fed’s upcoming policy deliberations, set for Tuesday and Wednesday. Policymakers stipulated this summer that if inflation did not soon moderate, they stood ready to raise rates. Officials have yet to precisely define what “soon” means, but many have run out of patience.
The Fed’s preferred inflation gauge is the Personal Consumption Expenditures price index, which will be released Sept. 30. It has shown the Fed missing its 2 percent target for over five years. Officials also closely scrutinize the C.P.I. report and other metrics for a comprehensive picture of the backdrop. Core measures are paid the most attention given that they are seen as a reliable way to track how persistent inflation is proving to be.
Policymakers are also digesting a multitude of new risks. The global price of oil is back up above $100 a barrel as the Iran war continues to disrupt supply. President Trump has reignited a trade war with Canada. And on Wednesday, he vowed to distribute a $5,000 check to every American adult if Republicans keep control of Congress in the November midterm elections, a bump to economic activity that could further fuel inflation.
In the wake of Friday’s data release, traders in federal funds futures markets now see 90 percent odds that the Fed raises rates by a quarter of a percentage point next week. Since January, rates have stood at a range of 3.5 percent to 3.75 percent.
“You have an economy where growth remains very solid. You have a labor market that has rebounded and looks to be tightening at the margins. You have inflation that has continued to run above target for an extended period of time, and you have forward-looking inflation indicators that suggest that overshoot will continue,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “Against that backdrop, and with the Fed not clearly restrictive, I think the case to raise rates next week is very strong.”
Raising rates just months before the election would undoubtedly stoke tension with Mr. Trump. Last week, the president threatened to halt a broad swath of U.S. trade unless the Fed slashed rates. Cutting borrowing costs is not even under consideration.
Still, that has not stopped the administration from trying to tamp down borrowing costs using its own tools. Treasury Secretary Scott Bessent has over the past month embarked on a series of interventions to keep a lid on long-term Treasury yields with little success. The 10-year Treasury yield is now trading just shy of 5 percent.
But the stakes for Kevin M. Warsh, the Fed chairman, are exceptionally high heading into the meeting. Late last month, Mr. Warsh delivered a closely watched speech at the central bank’s annual conference in Jackson, Wyo., that sought to underscore his commitment to fighting inflation after some doubts had emerged.
He indicated enough of an openness to raising rates that investors quickly piled on bets that the Fed would raise rates in September. But Mr. Warsh last month purposely left vague what specifically would tip him in that direction.
“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” he said. “Otherwise, we have work to do.”
What Mr. Warsh is trying to avoid is a redux of the reaction he faced after the Fed’s last meeting in July. Then, he failed to provide sufficient reasoning for standing pat and sowed confusion about how he planned to make good on his pledge to return inflation to target. That sparked a sell-off in longer-term borrowing costs, which has since only intensified.
Mr. Warsh’s job as chairman next week will be to corral his colleagues, while also providing a clear-cut rationale for the Fed’s decision. Policymakers who have long supported higher rates have argued that the Fed’s current policy settings are not restraining demand. Higher rates would not only expedite the return of 2 percent inflation, they say, but also ensure that expectations about inflation do not suddenly shift higher.
If the Fed raises rates next week, Mr. Warsh will also be under pressure to put some parameters around how much tightening might be necessary. Economists do not know what to expect in that sense, however, because Mr. Warsh has been steadfast in his commitment to not providing specific guidance about what he thinks the Fed should do next.
Pooja Sriram, an economist at Barclays, believes the Fed will now raise rates twice this year, first in September and again in December.
“One rate hike really doesn’t solve anything, especially if you are worried about inflation not moving at sufficient speed toward the 2 percent inflation target,” she said.
One rate rise, let alone of series of adjustments, would go against Mr. Trump’s stated wishes. But there are many investors who warn that the market response would be much more negative if the Fed did not follow through with a move at this point.
Mr. Bessent has also sought to push back on the idea that there is tension with Mr. Warsh, who he regularly sees for breakfast as Treasury secretaries and Fed leaders have long done.
“They want to set up Scott Bessent versus Kevin Warsh; that was rubbish,” Mr. Bessent said in an interview with Steve Bannon this week, referring to reports that he is at odds with the Fed chairman. “Kevin and I have known each other for 20 years. To think that I don’t know what the chair of the Fed’s thinking is, is absurd.”
The counterargument to raising rates rested on the assumption that inflation was going to decelerate in the latter half of the year, giving the Fed flexibility to delay taking action. John C. Williams, who as president of the Federal Reserve Bank of New York is vice chair of the policy-setting committee, espoused this view, arguing that policy was in a “good place.” Still, he made clear that he would support higher rates if the data did not cooperate.
Christopher J. Waller, a Fed governor, also recently suggested that he was inclined to hold rates steady next week, but only if inflation continued to cool.
August’s data challenges the narrative that inflation is indeed cooling in a timely way.
One closely watched subset of the C.P.I. report is called supercore inflation, which tracks prices of services excluding energy and housing. It accelerated to 0.5 percent in August and is up 3 percent from a year ago.
Energy prices were a big driver of overall inflation. Gasoline costs were up 3.9 percent in August. Prices for fuel oil, which is used to heat homes, jumped even more, at 10.1 percent. That also helped to drive a rise in airline fares, which jumped 2.7 percent in July. Compared with the same time last year, they are up nearly 25 percent.
The impact of Mr. Trump’s initial round of tariffs, however, seems to have faded. Goods prices appear to have stabilized after last year’s shocks. Household furnishings are up less than 1 percent since this time last year. Apparel prices were up 3.6 percent over the year, but were flat in August compared with July. Still, these prices were recorded before Mr. Trump’s latest round of punishing tariffs on Canadian imports.
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