Economists forecast that the August Consumer Price Index report will show inflation continued to slow during the month. The key question is whether the trend will be enough to head off an interest rate increase from the Federal Reserve next week.
The CPI report is expected to factor heavily as policymakers debate whether interest rates are sustainably bringing price increases under control. The Fed is scheduled to announce its verdict on Wednesday afternoon.
For August, economists expect the CPI to increase 0.4% after rising 0.1% in July, according to FactSet. Economists forecast the year-over-year inflation rate to slow to 3.3% from 3.4%, continuing its descent from an energy-driven spike earlier this year. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.2% for the month and 2.4% year over year.
Inflation remains well above the Fed’s 2% target, and economists say last week’s unexpectedly strong August jobs report means the central bank will be focused on price stability. Friday’s CPI and Thursday’s Producer Price Index will be the last inflation updates policymakers will get before they decide whether to carry through with the interest rate hike investors expect. “This is the most consequential CPI in some time,” says Christopher Hodge, chief US economist at Natixis. “The Fed is on a knife’s edge about whether or not to go at next week’s meeting.”
August CPI Inflation Report HighlightsCPI report release date and time: Friday, Sept. 11, at 8:30 am ETCPI is forecast to rise 0.4% in August after rising 0.1% in July.Core CPI is forecast to increase 0.2% over the month after rising the same amount in July.CPI is forecast to rise 3.3% year over year after increasing 3.4% in July.Core CPI is forecast to increase 2.4% from a year ago after posting a 2.5% increase in July.Gas Prices Could Drive First Energy Inflation in Three Months
Economists say rising gas prices are a key reason the month-over-month inflation rate likely jumped to a three-month high in August. “The strength in headline CPI reflects higher energy prices in August following two consecutive months of declines,” wrote Halim Abourachid, US economist at Vanguard, in a note on Tuesday.
Oil prices rose slightly in August as renewed fighting in the Iran war continued to disrupt crude shipments out of the Persian Gulf and Red Sea. West Texas Intermediate futures dropped early in the month as the United States touted progress in peace talks. Those talks stalled, and skirmishes resumed shortly thereafter, causing WTI to end the month about 1% higher at $85.76 a barrel. Gasoline prices briefly dipped in mid-August, but they also rebounded to end the month unchanged, according to AAA.
Core CPI Seen Slowing
Away from the energy price swing, economists are focused on what the August CPI report will show about the underlying inflation trend.
Core inflation opened the year at 2.5%, near a five-year low. In March, spiking oil prices from the war began to push up the cost of goods and services. The core inflation rate neared 3% in May as the effects of the conflict and tariffs rippled through consumer prices. Since then, core inflation has dropped back to 2.5%, aided by waning tariff impacts, cooling oil prices, and moderating housing costs.
Goldman Sachs economists expect owners’ equivalent rent and rent of primary residence (which together account for more than 40.00% of the core index) to decelerate from 0.26% each in July to “benign” increases of 0.22% and 0.23%, respectively. Natixis’ Hodge also forecasts “fairly subdued” shelter prices.
The AI data center buildout and the upward pressure it is putting on memory and data storage prices could show up in Friday’s report. Personal computer prices accounted for about a quarter of the 0.2% increase in core goods prices in July. Vanguard predicts core goods prices rose 0.15% last month “amid signs of broadening AI-related inflation beyond computer software and accessories.”
Economists predict higher oil prices will spill over into core services inflation via jet fuel. Higher fuel costs drove a more than 2% rise in airfares in July, and Vanguard expects August’s data will show a roughly equal increase. Goldman Sachs predicts airfare inflation accelerated to 4% last month.
Ultimately, economists are expecting Friday’s report to show core inflation continuing its descent toward the Fed’s target. “Outside of the components that are related to the AI and data center buildout, it’s really hard to see where that reacceleration in inflation is going to come from,” says Hodge.
What the August CPI Report Could Mean For the Fed
The latest inflation data will likely be top of mind during next week’s Fed meeting. As of Wednesday, investors see a 60% chance that the Fed will raise interest rates by a quarter point for the first time since 2023 on Sept. 16. Those odds are down from 63% a week ago but up from 44% a month ago. Policymakers have held the federal funds rate in a range of 3.50%-3.75% since December.
Fed officials’ recent statements have cast doubt on the central bank’s patience to leave interest rates unchanged. “Chair [Kevin] Warsh struck a decidedly hawkish tone and appeared to lower the threshold for another rate increase” in his speech at the Fed’s annual Jackson Hole symposium last month, wrote Bank of America US economist Stephen Juneau, but “[New York Fed President John] Williams and [Fed Governor Christopher] Waller were relatively more dovish” in recent comments.
“The August CPI report and what the data imply for core [Personal Consumption Expenditures] could decide whether the Fed hikes rates in September,” writes Juneau. He expects “the data to be firm enough for the FOMC to follow through with a hike.”
Josh Hirt, US economist at Vanguard, expects the CPI will give the Fed room to keep interest rates steady. “We expect the Fed to hold next week,” Hirt says, “but we think there’s very little room for error in either of the inflation reports.” Hirt estimates this week’s CPI and PPI prints will imply core PCE, the Fed’s preferred inflation measure, increased 0.24% last month, a level at which he believes the committee would be comfortable holding.
Natixis’ Hodge predicts the FOMC’s willingness to look past one-off price shocks from conflicts and tariffs may be waning. “I think the core and headline numbers are much more important than the underlying components, which is different than how I felt in the past,” he said. “Now that we’ve been over target inflation for 65 consecutive months, I think the Fed’s sort of like, ‘Enough is enough. We have to put our foot down at some point.’”