US consumer prices rose 0.4% in August on a monthly basis, from 0.1% in July: the largest increase in three months. Over twelve months the headline index held at 3.4%, unchanged from July and in line with economists' consensus.
Energy did the driving again: gasoline rose 3.9% and accounted for more than a third of the monthly increase on its own, while the broader energy index gained 2.1% on the month and 16.3% over twelve months. Fuel oil rose 10.1% in a month and 52% in a year; natural gas (-1.1%) and electricity (-0.2%) moved the other way.
The number that moved prices: core
The surprise sat in the core reading, which strips out food and energy: 0.3% month on month against a 0.2% forecast, accelerating from 0.2% in July. On a yearly basis core slowed to 2.4% from 2.5%, the lowest since March 2021. The picture is therefore two-sided: the annual trend in underlying inflation keeps improving, but the monthly pace has stopped slowing.
August price gains were broad: communication 2.3%, lodging away from home 2.4%, airline fares 2.7% on the month and 23.4% over the year, the biggest annual rise after energy, education 0.8%, used cars and trucks 0.4%, new vehicles 0.3%. Shelter, the heaviest item in the basket, reaccelerated to 0.3% from 0.1% in July, with rent and owners' equivalent rent both up 0.2%, but over twelve months it cooled to 3.0% from 3.2%. Medical care fell 0.2% and motor vehicle insurance declined. Food rose just 0.1%: groceries were flat, eating out 0.3%, and 2.7% over the year.
The Fed: hike odds at 90%
The report is the last inflation reading the Federal Open Market Committee will see before its September 15-16 meeting, which ends on Wednesday the 16th with the vote on rates. After the release, fed funds futures put the odds of a 25 basis point hike at about 90%, up from roughly 70% before the data according to the CME FedWatch tracker; prediction markets price 79%, from about 70%. Rates have been parked in a 3.50%-3.75% range for all of 2026: September would be the first hike of the cycle under Chair Kevin Warsh.
Markets: stocks up, front end down
Twenty minutes after the release the S&P 500 was up 0.2% at 7,661.72, the Nasdaq 100 gained 0.2% to 29,376.08 and the Dow was 0.2% higher at 52,552.49; the Russell 2000 slipped less than 0.1% to 2,916.90. The two-year Treasury yield eased to 4.592%, below where it traded before the data and more than 5 basis points off its post-release high. The backdrop stays strained: Brent crude above $105 a barrel, diesel above $6 a gallon for the first time, and the 30-year Treasury yield at levels last seen in 2007.
The signal to read is the gap between the two: hike odds jump from 70% to 90%, yet the two-year yield does not rise. Markets are pricing one move, not the start of a tightening cycle.
Warsh, Waller and the real question
Warsh has tied his line to inflation returning to 2%: if the data do not improve, he said, there is still work to do. Governor Christopher Waller said last week that the August figures would weigh heavily on his decision and that it would not take much acceleration in inflation to push him towards a hike. For Kathy Bostjancic, chief economist at Nationwide, Warsh and others signalled that rates can stay on hold only if disinflation continues, and the August report did not deliver that continuity: Nationwide now expects a quarter-point hike.
The real game therefore shifts to tone. On Wednesday markets will look past the decision itself and try to judge whether this is a one-off move or the beginning of a more restrictive phase. The next US inflation print lands on October 14, with September CPI. Until then, volatility in bonds, the dollar and the most liquidity-sensitive assets is likely to stay high.
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