What to know about the August inflation spike

The August report marked the second straight month of faster price growth and exposed some potential hot spots in the economy. Even so, experts expect the Federal Reserve to look past the slight spike in inflation and keep interest rates unchanged at an upcoming policy meeting.

“This report will comfort data-dependent Fed policymakers as they gradually move away from a ‘tighten at all costs’ paradigm to a more conditional ‘tighten if surprised’ paradigm,” wrote Gregory Daco, chief economist at EY, in a Wednesday analysis.

Here are four things to know about the August inflation report.

Gas and transportation squeezed consumers

Summer often brings higher energy prices as Americans travel for vacation and lean on their air conditioning to stay cool. That’s why economists were not surprised to see an August surge in gas prices boost overall inflation.

The 10.6 percent jump in gas prices last month was responsible for more than half of the August increase in inflation, the Labor Department said. Energy prices on the whole were up 5.6 percent in August, though electricity prices rose just 0.2 percent.

“For consumers, the most immediate impact of August price changes are being felt at the pump. Because of this, disconnect between what overall inflation is actually doing and how people are perceiving it will continue,” explained NerdWallet data analyst Elizabeth Renter in a Wednesday analysis.

Prices for transportation services also jumped 2 percent as companies compensated for higher gas prices and demand. Airline fares rose 4.9 percent last month alone and auto insurance costs rose 2.4 percent on the month.

“Energy price inflation has been the key driver of the post-pandemic inflation flareup, spilling over into transportation and commodities most directly, and pulling everything else up with it,” said Julia Pollak, chief economist at ZipRecruiter, in a Wednesday analysis.

Housing costs are still a problem

Stubbornly high rents and housing prices have been a major force behind inflation throughout the recovery from the pandemic-induced recession. 

Shelter costs rose for the 40th consecutive month in August, rising 0.3 percent last month and a whopping 7.3 percent over the past year. Rents were up 7.8 percent on the year and 0.3 percent last month, putting further pressure on inflation.

Roughly one-third of the CPI is driven by shelter costs, which makes overall inflation very sensitive to movements in rents and home prices. Experts, however, see reason for optimism in the August shelter numbers.

The monthly increase in shelter costs was the smallest since 2021, and a raft of private-sector data shows rents and home prices rising at a slower rate, said Bill Adams, chief economist at Comerica Bank.

He added that the CPI is often several months behind private-sector price data and expected “a big wave of multifamily housing under construction” to help bring around lower rents next year.

‘Core’ goods are getting cheaper

Americans are finally starting to see basic household goods get cheaper after years of bracing at the cash register.

Prices for goods excluding food and energy fell 0.1 percent in August. The Fed pays close attention to prices for so-called “core” goods and services outside of the volatile food and energy sectors.

While food is excluded from core inflation readings, Americans also saw prices for groceries rise at a much slower pace.

“One bright spot is an easing of price pressures in food costs. Costs for food at home — a staple household expense — were up just 0.2 percent in August and even the pesky increases in costs for food away from home came in at a more temperate 0.3 percent for the month,” said Bankrate chief financial analyst Greg McBride.

The inflation fight is far from over

The August CPI report was a stark reminder of how hard it can be to bring down high inflation.

“After easing since last summer, energy prices spiked again in August, reigniting inflation and throwing the prospects of a September pause in interest rate hikes, and soft landing, into doubt,” Pollak wrote.

“The spike in energy costs also squeezes household budgets and reduces real wage growth, which could contribute to wage growth pressures in the coming months.”

The Fed is aiming to bring annual inflation back down to its target of 2 percent without slowing the economy into a recession. After boosting interest rates to a 22-year high in July, central bank officials are hoping that just one or two more hikes will be enough to quash inflation.

“Even though the overall path of inflation — including the core measures preferred by the Fed — has been downward, inflation may not be low enough now for the Fed to be comfortable with a pause,” wrote Daniel Altman, chief economist at Instawork, in an analysis.

“The slackening of the labor market is picking up speed, however, raising the potential for a crash landing (with higher unemployment) rather than a soft landing.”

Job growth has slowed toward prepandemic levels and the unemployment rate jumped to 3.8 percent in August, though this was due mainly to an influx of workers. The slowdown in the job market has alarmed progressive economists, who have been concerned that the Fed will drive the U.S. into a needless recession.

The Fed “can’t make homes more affordable or control oil prices by kicking workers out of their jobs. If we care about the cost of living, we need to focus on investing in people and families,” said Kitty Richards, acting executive director of the progressive nonprofit Groundwork Collaborative.