Stubbornly Hot Inflation Raises Pressure on the Fed

A gas pump in California earlier this year (Reuters)
Reuters
By Yuval Rosenberg and Michael Rainey

It's a somber Friday, as the nation marks the 25th anniversary of the 9/11 attacks. As part of the commemoration ceremony in New York City this year, a seventh moment of silence was added to honor the thousands who have died from illnesses related to their exposure to toxic conditions around Ground Zero.

Here's what else we're watching as we wait for Congress to return next week.

Stubbornly Hot Inflation Raises Pressure on the Fed

Prices in the U.S. economy kept rising in August, according to government data released Friday, ratcheting up the affordability squeeze on American consumers while raising pressure on the Federal Reserve to increase interest rates at its meeting next week.

The consumer price index rose 0.4% from July to August, the Labor Department announced, contributing to a 3.4% annual inflation rate. The monthly figure was four times higher than the prior month's reading, while the annual rate held steady. Both were in line with expectations.

Core inflation, a measure that ignores volatile food and fuel prices, rose 0.3% on a monthly basis, a bit higher than expected. The annual core reading stood at 2.4%.

Energy was a key driver of inflation, with gasoline prices rising 27.4% on an annual basis due to the war with Iran. Airfares were up sharply, as well, with prices up 23% over the last year due to more expensive jet fuel. But the price hikes extended beyond energy and closely related sectors, suggesting that inflationary pressure is becoming broader. Both hospital and car repair prices rose 5.2% year-over-year, while clothing was up 3.6% and restaurant prices up 3.4%. The cost of shelter rose 3%, and the price of food rose 2.7%.

What the analysts are saying: "America still has an inflation problem," Navy Federal Credit Union Chief Economist Heather Long said on X. "Americans are getting financially squeezed."

Long noted that inflation has now erased all wage gains since April. Wages have grown 3.1% over the last year, Long said, but topline inflation has been higher at 3.4%.

Mark Zandi, chief economist at Moody's Analytics, said the economy is under pressure from multiple sources, including the Iran war and President Trump's trade policies. "You've got a lot of shocks that are pushing up inflation and making it uncomfortably high," he told CNBC. "The shocks, we keep hoping they fade away into the background. But they're not going away. They're still plaguing us with these big increases."

The persistent pricing pressure seems to be spilling over into how people feel about the economy. The University of Michigan's survey of consumers showed sentiment dropping to 47.8, down from 51.7 at the end of August.

"Year-ahead expectations for both personal finances and business conditions plunged," said the survey's director, Joanne Hsu. "With a resurgence in fuel prices and trade tensions, consumers anticipate greater pressures on their pocketbooks to come."

Rate hike likely: Thanks to persistent inflation, Wall Street traders now assign an 87% probability to an interest rate hike when Federal Reserve policymakers meet next week, according to the CME FedWatch tool.

Greg Daco, EY-Parthenon chief economist, said Friday in a research note that he now expects the Fed to raise rates a quarter of a point next week. "We are changing our Fed call from a hold to a 25 [basis points] hike at the FOMC meeting next week," he wrote, per CBS News, adding that at least some officials were likely to believe that "the 'speed' of the disinflationary process is not satisfactory."

RSM Chief Economist Joseph Brusuelas agreed that the Fed will have to act. "With higher oil and distillate prices set to be passed downstream to consumers, the Federal Reserve has little choice but to raise its policy rate at its next meeting," he wrote in a research note. "We expect the Fed to raise its policy rate by 25 basis points at its meeting followed by at least two more hikes over the next year to put inflation on a credible path back to the central bank's 2% target."

Number of the Day: $6

The price of a gallon of diesel rose above $6 for the first time this week, with the national average registering $6.06 on Friday, according to AAA. The price has risen 21 cents in just the last week.

Diesel prices are up 55% since the start of the war with Iran, CNN reports, with the increase outpacing that of gasoline, which is 40% higher.

Andy Lipow of Lipow Oil Associates said there are few options right now for producing more of the essential fuel to ease prices. "Refiners have already been maximizing the production of diesel," he told CNN. "We simply can't get any more diesel out of the system."

Patrick De Haan, a fuel price expert at GasBuddy, noted that diesel is even more expensive in California, where much of the nation's food is grown. "California diesel has hit $8/gal average for the first time ever," he said on X. "[T]he state that grows a third of [A]merica's vegetables and two thirds of its fruits just made your grocery bill more expensive."

Social Security COLA for 2027 Now Projected to Be 3.5%-3.6%

As inflation continues to run hotter than the Federal Reserve's 2% annual target rate, Social Security beneficiaries are poised to see the highest cost-of-living adjustment in years, according to new projections.

The official cost-of-living adjustment, or COLA, for 2027 is scheduled to be announced on October 14, after the government releases one more month of inflation data. But the latest estimates, which factor in today's inflation report, say the 2027 COLA should be 3.5% to 3.6%, the highest since an 8.7% increase announced for 2023. The increase would take effect in January.

The increase for 2026 was 2.8%, lower than the annual inflation rate reported every month since March. The COLA for 2025 was 2.5%, following a 3.2% boost for 2024.

AARP said Friday that it now forecasts a 3.6% adjustment for 2027, which would boost the average retired worker's benefit by $75 a month. The new estimate is up from 3.5% in August.

The Senior Citizens League, a nonpartisan group that advocates for senior benefits, said Friday that its forecast has shifted the other way. It now forecasts a 3.5% COLA for next year, down from 3.6% a month ago. That translates to an increase of $67.90 in the average benefit check, which would climb to $2,007.98.

The Social Security COLA is based on a specific measure of inflation, the change in the federal government's "Consumer Price Index for Urban Wage Earners and Clerical Workers," also known as CPI-W, from July, August and September of one year to the next.

"The biggest thing we're watching with the COLA announcement coming are short-term shocks to the economy that push inflation way up or down in the next 30 days," Shannon Benton, executive director of The Senior Citizens League, said in a statement, adding that seniors will still feel squeezed by inflation whatever the final number is. "No matter if the COLA announcement comes in slightly higher or slightly lower than our prediction, seniors will probably end up disappointed in the long run."

Quote of the Day

"When I say something, I mean it! The $5,000 Dividend will happen because the People of our Country deserve it."

  • President Trump, in a post on his social media site, doubling down on the dubious promise he announced Wednesday night to send "Trump dividend" payments to all American adults.

In his post, Trump said his idea is being criticized by Democrats - he said "Dumocrats," to be accurate - but in truth, his pledge has met with bipartisan backlash, including concerns from some Republican members of Congress and fiscal hawks elsewhere.

"I have serious concerns with this $5,000-check proposal. We are already more than $40 trillion in debt, and I cannot support another massive spending package without a clear way to pay for it," outgoing Rep. Ralph Norman, a South Carolina Republican, wrote in a post on X Friday afternoon. "Tying government checks to the outcome of an election starts to sound like pay-to-play politics. Republicans should earn the support of the American people through good policy, not by promising another round of checks from Washington."

White House National Economic Council Director Kevin Hassett told Bloomberg on Friday that the $5,000 checks could be done through the budget reconciliation process and could be done "in a fiscally responsible way," which he suggested would involve other cuts to government spending.

Hassett also insisted that Trump's proposal is a serious one, despite the opposition from lawmakers. "The bottom line is that there are multiple paths to getting it done and, you know, don't underestimate President Trump," he said, noting that some Republicans had questioned Trump's plans to eliminate taxes on tips, overtime and Social Security. "The president can be very, very persuasive, and he's very serious about this proposal."

Trump, meanwhile, said in an interview with CBS News earlier this week that he does not think the dividend payouts would require congressional approval. Asked if lawmakers would need to sign off on the idea, Trump said: "Well, we think not. I think they will do it if we needed it. But we think not."

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