US inflation picks up keeping Fed on edge

US inflation surged last month, driven by rising gas prices following renewed conflict in the Middle East, raising concerns for voters ahead of the midterm elections in seven weeks. The consumer price index increased 3.4 percent compared to a year ago, according to the Labor Department's Friday report, mirroring the July data. However, inflation intensified month-over-month, with costs up 0.4 percent from July, nearly quadrupling the 0.1 percent rise from the previous month.

Despite prices remaining high more than five years after the pandemic's impact on the economy, the August report adds pressure on the Federal Reserve to raise interest rates next week, potentially increasing mortgage and auto loan costs. Federal Reserve Chair Kevin Warsh and other officials have indicated they require sustained disinflation before maintaining current interest rates.

While gasoline prices aren't the only rising costs, they are significant. Car repairs, wireless services, and appliances also experienced price hikes last month. Economists worry that higher fuel costs could ripple through other sectors. Diesel prices reached record highs above $6 per gallon, boosting shipping expenses for goods.

Airline fares rose 2.7 percent month-over-month, a 23 percent increase from a year ago. Excluding volatile food and energy categories, core prices rose 2.4 percent in August compared to a year ago, down slightly from July's 2.5 percent and signaling the third straight decline. However, monthly core prices surged 0.3 percent from July to August, the highest increase since April.

This surprising monthly rise in core prices may bolster Fed officials advocating for higher interest rates. Wall Street now views an 80% chance that the Fed will raise rates on September 16, a 10-point increase from Thursday. The Trump administration aims to address voter concerns about high prices and rising rates. President Donald Trump announced $5,000 payments to every American adult if the GOP retains congressional control, requiring congressional approval and potentially fueling inflation.

Treasury Secretary Scott Bessent has accelerated Treasury bond buybacks to keep longer-term interest rates low. The 10-year Treasury yield hit a nearly three-year high of 4.9 percent on Friday. Chris Mitchell, a 36-year-old auto parts retailer customer service agent, is still grappling with rising rent, food, and other expenses more than before the pandemic.

Before COVID-19, he ate out two to three times weekly and attended the theater frequently, but those activities have decreased. Mitchell and his girlfriend, who is 12, share a home with three older cars, paying $2,300 in rent annually. He plans to ask his boss for a raise soon. Gasoline prices jumped 3.9 percent from July to August, making them more than 27 percent higher than a year earlier.

Gas prices have continued to rise, suggesting inflation may worsen this month. The nationwide average gas price is $4.30 per gallon, 7 percent higher than a month ago. Hotel room prices increased 2.4 percent from July to August and are 3.2 percent more expensive than a year ago. Car repair costs rose 1.1 percent last month and are up 5.2 percent from a year earlier.

These rising service costs could also trouble many Fed officials, as they are not driven by higher energy prices. Analysts and the Fed had anticipated these categories to moderate by now.