No relief from inflation as Middle East clashes lifts fuel prices to painful levels

WASHINGTON (AP) — U.S. inflation accelerated last month as gas prices spiked in the wake of renewed fighting in the Middle East, underscoring the affordability challenges that are top of mind for many voters with midterm elections now just seven weeks away.

The consumer price index rose 3.4% last month compared with a year ago, the Labor Department said Friday, just like July. But inflation quickened month to month as costs jumped 0.4% from July, quadrupling the 0.1% registered in the previous month.

Inflation remains stubbornly elevated more than five years after prices soared as the economy emerged from the pandemic. Friday's report increases pressure on the inflation-fighters at the Federal Reserve to boost their benchmark interest rate next week, which could lift mortgage and auto loan costs in the months ahead.

Federal Reserve Chair Kevin Warsh and other Fed officials have signaled they would need to see continuing disinflation to leave rates where they are.

"Today’s August report did not deliver that,” said Kathy Bostjancic, chief economist at Nationwide.

Prices rise across many goods and services

Gasoline prices are not all that is rising. Prices for appliances, car repairs, and wireless phone services also jumped last month. Yet economists worry that more expensive fuel can spill into other parts of the economy. Diesel prices have hit record highs above $6 a gallon, which pushes up the cost of shipping for groceries and other goods.

Airline tickets rose 2.7% on a monthly basis, according to the new data, and have soared more than 23% from a year earlier.

Excluding the volatile food and energy categories, core prices were 2.4% higher in August than a year ago, down slightly from July's 2.5% and the third straight decline. But on a monthly basis, core prices rose 0.3% from July to August, the largest increase since April.

The surprising monthly increases in core prices are likely embolden those Fed officials who have pushed for higher interest rates. Wall Street investors now see a more than 80% chance that the Fed will increase rates Sept. 16, according to CME Fedwatch, a 10-point jump from Thursday.

The Trump administration is seeking to counter voter concerns about high prices and rising interest rates. President Donald Trump on Wednesday promised $5,000 payments to every American adult if the GOP keeps a majority in Congress. That would require congressional approval and could stoke inflation.

Treasury Secretary Scott Bessent has stepped up buybacks of Treasury bonds in an effort to keep longer-term interest rates lower. The yield on the 10-year Treasury reached a nearly three-year high Thursday and traded at a still-elevated 4.9% Friday.

Chris Mitchell, 36, a customer service agent for an auto parts retailer, says he is still struggling to keep up with rent, food, and other costs, much more than before the pandemic.

Before COVID-19 struck, Mitchell remembers eating out two to three times a week and frequently going to the theater, activities he has sharply reduced since. He and his girlfriend have three cars that are roughly 20 years old.

Rent at the home he shares with her and her 12-year old jumped $200 this year, to $2,300. He had moved in with them so he could more easily pay bills.

“I’ve been hurting, I need a raise, I’m about to ask my boss for one in the coming week, actually,” he said. He got a raise two years ago, “but it just doesn’t go as far any more.”

What has gotten more expensive

Gas prices jumped 3.9% just from July to August, Friday's report said, leaving gas prices more than 27% higher than a year earlier. Prices at the pump have continued rising, meaning inflation is likely worsening this month. The nationwide average cost of a gallon of gas on Friday is 7% higher than a month ago at $4.30.

In addition to rising plane ticket costs, hotel room prices climbed 2.4% just from July to August and are 3.2% more expensive than a year ago. Car repair costs rose 1.1% just last month and are up 5.2% from a year earlier.

The rising cost of services like hotel rooms and wireless plans will also unnerve many Fed officials, since they are not driven by higher energy prices.

“Analysts and the Fed had been counting on these categories of prices to moderate by now,” Scott Anderson, chief U.S. economist at BMO Capital Markets, wrote in a note. “The trends coming from the August CPI report do not build confidence that inflation is continuing on its path of moderation toward the 2% target.”

On Thursday, a wholesale price report showed a jump in chemical prices, likely a result of more expensive oil.

Apparel and grocery prices were unchanged from July to August, providing some relief to consumers, though eggs moved 2.9% higher last month. Egg prices are still down sharply from a year earlier.

Inflation as one-time shock or something more

Many economists and Federal Reserve officials have long considered higher gas prices one of several “one-time” shocks that are lifting inflation, along with tariffs and surging investment in AI data centers. For months, the hope has been that as the war against Iran wound down, and the effects of tariffs faded, inflation would grind lower.

Yet there are few signs of the Iran war cooling, and even Trump has said gas prices won't retreat until after the midterm elections in November. And while Trump's trade fight with Canada will impact a small number of imports, it is a reminder that tariffs remain a threat that could push up other costs.

“This is not one and done,” Bostjancic said. “It's unclear when tensions in the Middle East are going to settle down. ... This seems like it could be a prolonged disruption.”

Federal Reserve widely expected to lift rates

Friday's report has spurred many economists to pencil in a rate hike at the Fed's next meeting Sept. 15-16. Chair Warsh suggested he was leaning toward a rate hike in a high-profile speech two weeks ago, but he did not commit to doing so at a specific time.

Warsh has said he doesn't want to tip his hand about his next moves, leaving some uncertainty going into the meeting.

The Fed left its key rate unchanged at its last policy meeting in late July, but three officials voted in favor of hiking by a quarter point, which would have increased it to about 3.9% from 3.6%.