The August reports for the final-demand producer price index (PPI-FD) and consumer price index (CPI) make it clear that the current inflation episode brought on by the attack on Iran on February 28 is far from over. As the war drags on with little sign of resolution, energy prices remain volatile and elevated. The pass-through of costs to businesses and consumers is keeping index readings elevated compared to last year and well above the Fed’s 2 percent inflation target. In particular, prices for diesel fuel essential for transportation of goods are at an all-time high. Businesses are faced with untenable choices to fuel their fleets – raise prices, cut already razor thin margins, or layoff workers who will likely be hard and more expensive to replace.
Even if the conflict with Iran reaches a swift settlement, it will take some months for the ripple effects on prices to dissipate and many – if not most – prices will not roll back.
The August total PPI is up 5.4 percent compared to a year ago, and acceleration from up 4.8 percent in July. The core PPI for August – excluding food, energy and trade services – is up 4.7 percent, the same as in July. The PPI for foods is up only 0.1 percent from August 2025, but energy soars 24.4 percent. Trade services is up 4.5 percent year-over-year in August compared to up 4.0 percent in July.
Food prices often moderate in the late summer and early fall as the harvest comes in. However, the cost of getting food to consumers is going to push prices up more than usual in the next month or two. The hike in energy prices is exceptionally large and probably will east up a bit into September but it will still be a substantial upward move. Trade services are already feeling the impacts of chaotic tariff policy and transportation costs.
The August CPI is up 3.4 percent year-over-year, the same as in July and virtually the same as up 3.5 in June. The core CPI – excluding food and energy – is up 2.4 percent from August 2025, one-tenth below the up 2.5 percent in July. However, the improvement is mostly due to slower increase in food prices while energy costs are jumping. The CPI for food and beverages is up 2.6 percent in August from a year ago, falling three-tenths from up 2.9 percent in July. The CPI for energy is up 16.3 percent year-over-year, higher than up 14.7 percent in July.
While the August and July readings represent something of a plateau in upward consumer price pressures, this will be little consolation to households which have seen their non-discretionary spending decrease their overall spending power and eat up any buffer from prior wage gains.
The two reports plus the most recent postings of oil prices will leave the FOMC with few options but to conclude that the risks to price stability from inflation becoming entrenched are on the rise. The likelihood of a rate hike is firming. An increase of 25 basis points will signal that the FOMC is committed to bringing down inflation and defending its credibility as an inflation fighter.
As a footnote, the CPI-W for August provides two months’ worth of readings to estimate the COLA (cost-of-living-adjustment) for social security benefits to be applied in January 2027. The quarter-to-date average in 2026 is 327.793, up 3.3 percent from the full quarter average of 317.265 in 2025. This would be the largest increase since 8.7 percent in 2023.
