The Morning Brief: Energy costs drive inflation surprise as Fed prepares for rate call

The U.S. inflation picture Friday crystallized around a single tension: headline inflation stayed flat while underlying price pressures accelerated, driven almost entirely by energy costs tied to the Iran war and reduced Russian refining capacity.

August's consumer price index held at 3.4% annualized, matching July, according to data released by the Guardian and NBC News on September 11. But core inflation, which excludes volatile energy and food, jumped to 2.4% annually, up from the prior month. The monthly CPI rose 0.4%, with gasoline accounting for more than one-third of that increase. Gasoline prices climbed 27.4% compared to a year earlier, while fuel for heating and power surged 52% year-over-year. Brent crude, the global benchmark, surpassed $108 Friday, its highest level since May, while U.S. crude traded around $100 per barrel. Those levels stand about 20% higher than mid-August.

The energy surge has spilled into transportation costs. Diesel hit a record national average of $6.05 per gallon Friday, per AAA data cited by CBS News, up from $3.71 a year earlier. On Friday, the cost of diesel exceeded $6 a gallon for the first time ever, while the national average gasoline price sat at $4.29 per gallon, up $1.10 from a year ago. Gas prices remain elevated by more than 40% since the United States and Israel launched the Iran war on February 28, per NBC News.

Beyond energy, other price categories showed mixed movement. Core inflation's monthly rise of 0.3% signals underlying pressure beyond fuel alone. Shelter costs ticked up 0.3%, food costs rose 0.1% overall, and technology prices posted a notable acceleration, with computer software, accessories, and related items rising 25.4% over the last year, marking the largest yearly increase on record. Real average hourly earnings for U.S. workers decreased 0.1% from July to August, meaning wage growth has not kept pace with price increases.

The inflation reading arrived with the Federal Reserve's next policy meeting scheduled for Tuesday and Wednesday, September 16 and 17. Market odds for a rate hike jumped from under 70% to nearly 90% in minutes after the report's release, per NBC News. Odds for a follow-on hike in October rose to almost 60%. Fed governor Christopher Waller stated, according to the Guardian, "If inflation comes in hot, I would consider a rate hike," while Fed Chair Kevin Warsh said in Jackson Hole last month that underlying inflation trends had not "meaningfully improved" over the summer. Stephen Brown, Capital Economics' chief North America economist, said "The upside surprise to core CPI in August means the Fed looks set to hike next week." On Thursday, the average 30-year fixed rate mortgage rose above 7%, per NBC News.

The S&P 500 jumped almost 1% following the report, while the Nasdaq Composite spiked higher by 1.3%, per NBC News.