U.S. inflation topped 3.4 per cent boosting odds of interest rate hikes

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 per cent last month compared with a year ago, the Labor Department said Friday, the same as in July . But on a monthly basis, inflation quickened, as costs jumped 0.4 per cent from July to August, up from an increase of just 0.1 per cent the previous month.

The figures show that inflation remains stubbornly elevated, more than five years after prices first soared as the economy emerged from the COVID pandemic. Persistent inflation has presented a major challenge for the inflation-fighters at the Federal Reserve and has soured many voters on the Trump administration’s economic track record.

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

The larger-than-expected monthly increase in core prices will likely embolden those Fed officials who have pushed for the central bank to lift its benchmark interest rate at its meeting next week.

Wall Street investors now see about 70 per cent likelihood the Fed will increase rates Sept. 16, according to CME Fedwatch.

The Trump administration is seeking to counter voter concerns about high prices and rising interest rates as the midterm elections approach.

U.S. President Donald Trump on Wednesday promised $5,000 payments to every American adult if the GOP keeps a majority in Congress, a move that would require congressional approval and could stoke inflation. And Treasury Secretary Scott Bessent has stepped up buybacks of Treasury bonds in an effort to keep longer-term interest rates lower. Yet on Thursday the yield on the 10-year Treasury reached a nearly three-year high.

Renewed fighting in the Middle East has pushed up energy costs, with the nationwide average cost of a gallon of gas on Friday jumping more than seven per cent from a month ago to $4.30.

Hotel room prices and airfares also rose last month while new and used cars got more expensive. Apparel and grocery prices were unchanged from July to August.

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 centres. 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,” said Kathy Bostjancic, chief economist at Nationwide.