US consumer prices rose 3.4% in the year to August, unchanged from July and exactly in line with expectations, but the monthly increase of 0.4% was the sharpest since May, a sign the energy shock is starting to bite four days before a Federal Reserve decision markets expect will deliver a rate hike.
The last major data point before the Fed meets has arrived, and it arrived while Americans were paying record prices at the pump.
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The US Bureau of Labor Statistics reported on Friday afternoon that the annual rate held steady, with core inflation, which strips out food and energy, easing to 2.4% from 2.5%.
Every figure matched the consensus of economists and the monthly number is where the pressure shows.
Prices rose 0.4% in August against 0.1% in July, a fourfold acceleration and the fastest pace in three months. The annual rate stayed flat only because it is measured against the strong summer of 2025.
What it means for the Fed meeting
Markets had largely made up their minds before the figures landed.
CME's FedWatch tool put the probability of a quarter-point increase at the 16 September meeting at 67.4%, up sharply from around 40% before Chairman Warsh's Jackson Hole address in late August.
Following the inflation data release, those odds moved to 91.6%.
Warsh's first keynote as chair was the turning point as he argued the American economy had strengthened rather than weakened, that the labour market was consistent with full employment, and that he "would be hard pressed to describe broad financial conditions as restrictive."
On inflation Warsh was blunt by stating that "we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."
By that test, Friday's numbers are ambiguous.
Core inflation has now fallen for a second month and sits within half a point of the 2% target, which is underlying inflation moving in the right direction. The monthly acceleration points the other way.
Warsh also refused to say what would trigger a move, rejecting forward guidance as a practice that "has overstayed its welcome". The Fed has held its benchmark rate at 3.50% to 3.75% since December, though three regional presidents dissented in July in favour of an increase, the most in one direction since 2016.
A fuel shock with no obvious end
The pressure is coming from energy, and it is intensifying.
US crude futures topped $100 a barrel this week as fighting between American and Iranian forces escalated around the Strait of Hormuz, with Washington striking five Iranian tankers after attempted missile attacks on a US Navy warship.
Diesel is where it bites hardest.
The US national average crossed $6 a gallon on Friday for the first time in the country's history, at least in nominal terms, according to the American Automobile Association, and leaving truckers and farmers paying around 63% more than a year ago.
In California the average is close to $8. As for petrol, it is averaging $4.22 nationwide, against $2.98 before the war began.
Ukraine's strikes on Russian refineries prompted Moscow to ban diesel exports, removing roughly 800,000 barrels a day, while disruption around Hormuz has cost another 1.2 million.
Refineries representing about 5 million barrels a day of capacity have been shut by the two wars, and close to 8% of global diesel supply is currently disrupted.
Some retailers have already added delivery surcharges, and the effect on grocery prices tends to arrive with a lag, which means the energy shock in Friday's numbers may not yet be the whole of it.
