Hot CPI Boosts September Rate Hike Bets to 90%

— U.S. CPI, August (month-over-month): 0.4% (estimate 0.4%; prior 0.1%)
— CPI (year-over-year): 3.4% (estimate 3.4%; prior 3.4%)
— Core CPI (month-over-month): 0.3% (estimate 0.2%; prior 0.2%)
— Core CPI (year-over-year): 2.4% (estimate 2.4%; prior 2.5%)

EXECUTIVE SUMMARY

• Headline in-line. Headline consumer prices rose 0.40% in August from July (m/m), the most since May and right in line with the 0.4% expected, after a 0.07% gain in July. Prices were up 3.40% from a year earlier (y/y), also right in line with the 3.4% expected, up from a revised 3.30% in July.
• Core ran hot. Excluding food and energy, prices rose 0.29% (rounding to 0.3%) against the 0.2% expected — the firmest monthly reading since April — even as the annual rate eased to 2.45%, the lowest since March 2021.
• Gasoline drove the headline. Energy jumped 2.10% after two straight declines, with gasoline up 3.90%, accounting for over a third of the entire monthly all-items increase. Energy is now 16.28% higher than a year ago.
• One line did a lot of damage to core. Education and communication services rose 1.87%, the largest monthly increase on record, driven by a 5.94% jump in wireless telephone services — an all-time high that Inflation Insights’ Omair Sharif calculated added 10 basis points to core on its own.
• Shelter firmed but the trend still cooled. Shelter rose 0.27% from 0.14%, though the pickup came from a 2.28% rebound in hotels rather than rents — owners’ equivalent rent slowed to 0.19% and rent to 0.17%. Annual shelter inflation eased to 3.03% and rent to 2.75%, both the lowest since March.
• Breadth remains a sticking point. According to Claude’s calculations, 61.8% of the CPI basket is still running above 3% year over year, though only 7.0% is above 5% and 14.2% is outright falling. Inflation breadth was specifically flagged by Chair Warsh at Jackson Hole. “Over the past 12 months, 54% of goods and services in the PCE basket showed price increases above 3%. This is well below the post-pandemic highs of about 77%, but it remains well above the level of 32% in the two decades that preceded the pandemic.”
• Core PCE. Both Goldman Sachs and Bank of America raised their tracking estimates for core PCE, the gauge the Fed officially targets. Goldman now sees core PCE rising 0.26% in August, while Bank of America came in hotter still, tracking core PCE at 0.30% m/m.
• The Fed angle. Markets priced a roughly 90% chance of a hike at the September 15–16 meeting, up from about 70% before the release, with swaps showing 22 basis points priced.

Now let’s take a deeper look with lots of charts and details:

Headline consumer prices rose +0.40% in August, the most since May and barely rounding down to the +0.4% expected, after a +0.07% gain in July. Prices were up 3.40% from a year earlier (y/y), also right in line with the 3.4% expected, up from a revised 3.30% in July.

Energy reversed to +2.10% after two months of declines, with gasoline +3.90%, accounting for over one third of the entire monthly all-items increase. Fuel oil also surged +10.1%, while a small offset was electricity falling -0.20% and natural gas -1.20%. From a year earlier energy is +16.28%, re-accelerating from +14.73% in July, with gasoline +27.40% and fuel oil +52.04%.

Food slowed to +0.13%, with groceries (green) roughly flat at +0.04%. Four of the six major grocery groups rose — dairy +0.3% (cheese +0.7%), meats/poultry/fish/eggs +0.1% (eggs +2.9%), other food at home +0.1%, nonalcoholic beverages +0.2% — while cereals and bakery was unchanged. Fruits and vegetables fell -0.4%, a third straight decline, as lettuce dropped another -6.2% after July’s record -16.4%, the cyclospora parasite shock continuing to unwind. Dining out though rose double that at +0.26%.

Food is +2.67% y/y, with groceries +2.19% and dining out +3.37%.

Stripping out food and energy, core rose +0.29% (rounding to +0.3%), above the +0.2% expected and the firmest since April, though the annual rate eased to +2.45%, the lowest since March 2021.

Core services rose +0.33% from +0.23%, but much of that was education and communication services which rose +1.87%, the largest monthly increase on record, driven by wireless telephone services +5.94%, an all-time high. Inflation Insights’ Omair Sharif noted the wireless jump alone added 10 basis points to the full core rate, and that stripping it out would leave core looking far tamer — though he cautioned that would be a tricky game for the Fed to play. Education contributed as well, with elementary and high school tuition +1.4%, the most since 2004, and day care and preschool +1.0%.

Elsewhere in services, transportation rose +0.46% on airline fares +2.76% (a second strong month) and car and truck rental +2.2%, while lodging away from home rebounded +2.28% (hotels +2.7%) after two sharp World Cup-payback monthly declines. On the cooler side, medical care services fell -0.25%, their largest drop since 2023, with dental -0.6% and both hospital and physicians’ services unchanged. Motor vehicle insurance fell -0.74%, a third consecutive decline, and health insurance -0.5%. Recreation services were flat at 0.00%. Core services are +3.02% y/y.

Shelter re-accelerated to +0.27% from +0.14%, though the internals were softer than the headline suggests: owners’ equivalent rent slowed to +0.19% and rent of primary residence to +0.17%, with the monthly pickup driven mainly by the lodging rebound noted in the previous paragraph.

Annual shelter inflation continued easing to +3.03%, the least since March, from +3.18%, rent to +2.75% from +2.86%, and owners’ equivalent rent to +3.08% — shelter and rent both the lowest since March.

Core goods remained subdued rising +0.11%, as new vehicles gained +0.24% and used cars +0.37%, while apparel was unchanged and household furnishings roughly flat.

Core goods are +0.66% y/y the least since June 2025.

The data-center buildout again stood out: computers, peripherals, and smart home assistants rose +3.88%, the second most on record, and is +8.4% y/y, also the second most on record after September 2021. JP Morgan chalked the gain in part to Apple price increases. While computer software and accessories fell -2.2% on the month it is up a record +25.4% from a year earlier. On the other side, medical care commodities fell -2.69% y/y and used cars -2.32%.

Supercore — core services excluding housing — one of the key metrics from this report on underlying inflation — rose +0.51%, the biggest increase since January, with the annual rate at +3.02%, according to Bloomberg’s calculation. Bloomberg noted that annual rate sits above pre-Covid levels; there was no 3%-plus reading anywhere in 2019. On the BLS’s own services-less-rent-of-shelter measure, the monthly gain was +0.31% with the annual rate at +3.10%.

Breadth: a measure Warsh is watching. At Jackson Hole last month, Chair Kevin Warsh drew attention to the diffusion of price increases — the share of individual categories running hot — rather than the headline rate alone. Breaking the PCE basket into its 199 components, he noted that over the prior 12 months “54% of goods and services in the PCE basket showed price increases above 3%,” well below the post-pandemic peak near 77% but far above the roughly 32% that prevailed in the two decades before the pandemic. That framing matters because the PCE gauge he referenced does not arrive until September 30, after next week’s meeting, leaving CPI as the closest available read.

Running the same exercise on this report* — across 136 priced CPI item categories covering roughly 79% of the basket — 61.8% of the basket, and 50% of items, is running above 3% year over year, with 7.0% of the basket above 5% and 14.2% outright falling. So a majority of the basket remains above 3%, even as very little is running genuinely hot with the above-5% bucket dominated by items such as airline fares (+23.4%), computers and peripherals (+8.4%), and cigarettes (+7.0%). On a monthly-annualized basis 45.3% of categories cleared 3% in August per Claude, closely matching Pantheon Macroeconomics’ read of 46%, up from 45% in July, with the three-month average little changed near 44%.

* Note: breadth figures are Claude’s own calculations from BLS Tables 6 and 7, not a BLS or Street-published statistic.

On the read-through to households, with the strong increase in wages in the Employment Situation report, real (inflation adjusted) average weekly earnings improved from July and remained positive for a third month +0.16% m/m and +0.34% y/y (although both still weak historically).

Core PCE

Both Goldman Sachs and Bank of America raised their tracking estimates for core PCE, the gauge the Fed officially targets. Goldman now sees core PCE rising 0.26% in August, up from 0.24% before the CPI release, for a year-over-year rate of +3.16% — a figure that already incorporates its forecast of the revisions coming with the methodology changes in the August PCE report — and headline PCE +0.32%, or +3.54% from a year earlier. Goldman’s component math is a useful map of where the core surprise came from: wireless phone services, which it notes have been particularly volatile in recent months, added about 10 basis points, while airfares and lodging each added 4 basis points, matching the strong domestic passenger airfares reading in Thursday’s PPI. Offsetting, owners’ equivalent rent and rent added just 6 and 2 basis points and were more benign than expected, consistent with a continued slowdown in their underlying trends — though Goldman points out both carry roughly half the weight in PCE that they do in CPI. Car insurance and medical services subtracted 3 and 2 basis points.

Bank of America came in hotter still, tracking core PCE at 0.30% m/m and 3.4% y/y, noting the core beat was driven largely by core services at 0.33% despite softer rent and OER. BofA called this the last data point the Fed gets before the meeting and said it “should clear the way for a hike next week,” with markets pricing close to 22 basis points. Like Goldman, it flags uncertainty from the software and legal services methodology changes, but says that does not alter its view on the decision. The gap between the two is worth watching: both round to 0.3% on the month, but BofA’s 3.4% annual estimate sits well above Goldman’s 3.16%, a spread driven largely by differing assumptions about the methodology revisions landing with the September 30 release.

Fed Readthrough

The market took the report as making a rate hike at the September 15–16 meeting as a near certainty. Both the CME FedWatch tool and rate swaps moved to roughly a 90% chance of a 25 basis point hike, up from about 70% before the release, with 22 basis points priced and the overall tightening path steepening to 93 basis points over the next 12 months from 88. The two-year yield initially rose 5 basis points to 4.63% before paring that back, but longer-dated yields are falling, while equities shrugged it off with S&P 500 futures rising as crude retreated back below $100. The Fed is now in its blackout period, so no official commentary arrives before Wednesday’s decision absent a media leak.

Other Analyst Reaction

Reaction ran heavily in the direction of a coming hike. Nationwide’s Kathy Bostjancic wrote that “the renewed march higher in oil, gasoline and diesel prices add to concerns that higher energy prices could spill over to other goods and services and inflation expectations,” and shifted her call to a 25 basis point move. Natixis’ Christopher Hodge argued Warsh’s Jackson Hole hawkishness “will likely now force a hike next week in order to avoid falling into a self-imposed credibility trap.” Principal’s Seema Shah said the question has already moved on: “The debate has quickly shifted from whether the Fed will hike to the more important question of how many hikes this cycle will ultimately require,” adding she does not expect a one-and-done.

Not everyone agreed though. Mischler Financial’s Tom di Galoma said he does “not think the Fed will hike rates next week based on this figure” given how divided officials are, placing higher odds on October. Bloomberg Economics’ Anna Wong leaned slightly toward a hold, calling it a very close call, and flagged that the Bureau of Economic Analysis’s methodology update on September 30 should revise away some of the apparent core PCE acceleration. Bloomberg Intelligence’s Ira Jersey framed the risk in reverse: “The surprise for the market now would be for the Fed to remain on hold,” warning the long end could sell off and retest the 5.02% cycle high on the 10-year. LPL’s Jeffrey Roach noted a hike may matter less than usual for growth, with a rising share of activity less rate-sensitive amid the AI investment surge.

The Bureau of Economic Analysis is scheduled to release August PCE data on September 30, and the next CPI report, for September, is due October 14.