US inflation steady in August, fueling Fed rate hike expectations

US consumer inflation was unchanged at 3.4 percent in August, government data showed Friday, with persistent high prices raising expectations that the Federal Reserve will hike interest rates in the world's largest economy next week.

Consumer price index (CPI) inflation remains significantly elevated from earlier in the year and well above the Fed's long-term two-percent target.

US households have been battered by years of high prices since the pandemic -- when consumer inflation hit 9.1 percent -- and Americans' ability to afford basics like food and fuel will be a key issue in November's midterm elections.

Several Fed policymakers have indicated they would be prepared to raise interest rates if August inflation data did not show a slowdown in price increases. The central bank's rate-setting committee meets next week.

Any move to raise rates will be sure to anger US President Donald Trump, who has launched an unprecedented campaign against the Fed's independence, demanding policymakers lower interest rates to spur economic activity.

The US president launched a criminal probe against previous Fed chair Jerome Powell, is attempting to fire another Fed governor and last week even threatened to cut trade ties with certain countries if the Fed raised rates.

Trump is under pressure over the high cost of living, with Democrats seeking to wrest control of both houses of Congress in November and block the Republican's agenda in the final two years of his term.

Fuel price increases accounted for one-third of the monthly rise in consumer prices, Friday's data showed.

The price of gasoline in the US is up 44 percent since the start of the Iran war in February, according to AAA motor club data.

Record diesel prices -- which hit an unprecedented $6 per gallon in the United States on Friday -- have also driven up transportation, farming and construction costs.

The index for inflation excluding volatile fuel and food prices -- so-called "core" inflation -- rose 2.4 percent in August year-on-year.

"The renewed march higher in oil, gasoline and diesel prices add to concerns that higher energy prices could spill over to other goods and services and inflation expectations," said Kathy Bostjancic, chief economist at Nationwide, in a note.

Market expectations of a rate hike surged in the wake of the inflation reading, with the probability of a 25-basis-point hike at 87 percent, according to CME's FedWatch tool.

High prices have been hitting the US economy hard, with wholesale inflation picking up more than expected in August, according to government data on Thursday.

The Fed last raised rates three years ago, capping a hiking cycle it began in the pandemic to combat surging prices.

Inflation has declined steadily from its 2022 peak, but never hit the Fed's two-percent target. In February it fell to 2.4 percent but subsequently surged to three-year highs on the back of Trump's war on Iran.

The United States and Israel launched strikes on Iran and killed its leadership at the start of the war, plunging the Middle East into chaos as Tehran targeted US regional allies and choked off a key energy trade route.

The Fed has gradually lowered rates since 2024 but has held them steady between 3.50 percent and 3.75 percent this year as inflation climbed following the Middle East war and as the effects of Trump's tariff war filtered through the economy.

Democratic Senator Elizabeth Warren slammed Trump over the latest inflation figures.

"Today's data confirms that Americans continued to pay more for housing, airline fare, and childcare in the month of August, while their wages have failed to keep up with inflation for five consecutive months," she said.

Many US households have been struggling in recent years, and on Friday a gauge of consumer sentiment by the University of Michigan was near an all-time low.

"With a resurgence in fuel prices and trade tensions, consumers anticipate greater pressures on their pocketbooks to come," said survey director Joanne Hsu.