The consumer price index rose 0.4% in August, matching July's reading and leaving annual inflation at 3.4%, according to the Bureau of Labor Statistics. The report confirms what Federal Open Market Committee members had been saying for weeks: inflation remains stubbornly above the Federal Reserve's 2% target. Yet the data still leaves considerable room for interpretation as to whether prices are moving up or down—and, by extension, whether inflation will come down without another rate hike. For a monetary policy committee that has been split on inflation, the inconclusive report will compel the Fed to make a call on whether to raise interest rates or stay put when it meets next Tuesday and Wednesday.
Core CPI, which strips out volatile food and energy categories, rose 0.2% on the month and 2.4% year-over-year, a slight decline from July's 2.5% print. Energy prices have been driving overall inflation readings. Fed Gov. Christopher Waller addressed that dynamic directly in a speech last week, saying, "I don't see elevated energy prices and tariffs now as a significant source of ongoing inflation pressure." He added that the price effects of tariffs have largely passed through inflation and that his earlier worry about energy prices bleeding into broader goods and services prices "hasn't come to pass, at least so far." Waller also noted that a change in the calculation of the Bureau of Economic Analysis's personal consumption expenditure index, the Fed's preferred inflation measure, could push the overall reading even lower.
The evidence base for the Fed's decision remains split. Waller said he would support keeping the federal funds rate at its current target range of 3.5% to 3.75% if he perceived inflation to be falling, and he expressed openness to a hold: "To paraphrase John Lennon, I'm willing to give disinflation a chance." Fed Gov. Michael Barr echoed that openness, saying he would support keeping rates unchanged if inflation appeared to be moving in the right direction. But Fed Chair Kevin Warsh has set a higher bar, stating at the Kansas City Fed's Jackson Hole conference, "Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." Warsh also noted that over the past six months, 49% of components in the PCE index rose at least 3% on an annualized basis—a level he described as "quite elevated," though better than the 54% share over the prior 12-month window.
The market reaction underscored the report's ambiguity. Two-year Treasury yields climbed to their highest level in more than two years, while federal funds rate futures priced in a more than 90% chance of a hike shortly after the CPI release, up from around 73% on Thursday. That shift complicates the picture for banks and other rate-sensitive sectors, which had been coalescing around a hike since Warsh's Jackson Hole speech. The official PCE data for August will not be released until after next week's FOMC meeting, leaving Warsh and other participants to interpret how August's CPI fits into the broader trend without their preferred gauge. As Warsh put it, "We want to gauge whether underlying inflation is rising, falling, or stuck in place. We also want to understand not just the direction of travel, but also the speed."
The report's limitations are clear. The headline CPI figure remains above target, but the core measure is moving in the right direction, and Waller has argued that underlying inflation may be doing better than the core numbers suggest because of imputed nonmarket services prices. The absence of August PCE data before the meeting means the committee will be making a judgment call on incomplete evidence. What to watch next: the FOMC's decision and statement next week, the subsequent release of August PCE data, and whether Warsh's confidence threshold—"clearly and at sufficient speed"—is met by the modest improvement in core inflation.