Consumer prices in the USA rose 0.4% in August, four times July’s 0.1% increase, while annual inflation remained at 3.4%. The politicians will point to that 3.4% number and pretend inflation has somehow stabilized. But look beneath the surface and you see an entirely different economy. Energy rose 2.1% in a single month and 16.3% from a year ago. Gasoline jumped 3.9% in August alone and is now 27.4% higher than a year ago. Other motor fuels, including diesel, surged 9.6% in one month and 44% annually. This is precisely why reducing inflation to one government statistic is absurd.
The August Producer Price Index already rose 0.4% for the month and 5.4% annually, while processed goods for intermediate demand jumped 1.8%. Diesel prices at the producer level surged 24.1% in August. Those costs work their way through the entire economy. Businesses either raise prices, reduce margins, cut workers, or close. There is no fifth option.
Food increased only 0.1% for August and grocery prices were unchanged, but that does not mean Americans suddenly received relief. Food prices remain 2.7% higher than a year ago. Eggs rose another 2.9% during August. Eating at restaurants continues to rise, and households are still paying the snowballing increase from the inflation that already occurred. Government economists speak as though a lower rate of inflation means prices went back down. They did not. If something rises from $100 to $120 and then increases another 3%, you are not recovering purchasing power. You are simply being robbed more slowly.
Shelter increased 0.3% in August and remains 3% higher annually. This is where the Federal Reserve has created its own nightmare. Raise rates to fight inflation and mortgage payments become unaffordable. Lower rates and you risk reigniting asset prices and inflation. Meanwhile, the federal government continues borrowing trillions regardless of where rates stand. There is no monetary policy that can cure fiscal irresponsibility.
Core CPI supposedly looks better because it excludes food and energy, precisely two things people cannot choose to stop buying. Core inflation rose 0.3% in August, stronger than expected, although the annual rate eased from 2.5% to 2.4%. Airline fares rose 2.7%, hotel and motel prices jumped 2.4%, mobile phone costs surged 5.9%, and new and used vehicle prices also increased. So while economists debate whether 2.4% core inflation is encouraging, the person trying to pay the bills sees something entirely different.
Inflation-adjusted average hourly earnings declined 0.3% from a year earlier. Real wages have now fallen for five consecutive months. THAT is what people actually feel. It does not matter what Washington tells them about GDP or employment when the paycheck buys less every month. People know inflation from their bank account, not from some economist sitting in Washington manipulating a basket of goods.
This is also why the Fed is trapped. Markets are now overwhelmingly expecting another rate hike. But raising rates will not reopen the Strait of Hormuz, produce another barrel of oil, lower diesel prices, or end geopolitical conflict. You cannot cure an energy shortage with interest rates. The Fed will nevertheless raise rates because that is the only tool it has, and then everyone will blame the Fed when mortgages, auto loans, business credit, and government interest expense rise again.
This inflation is increasingly geopolitical and fiscal rather than merely monetary. War drives energy higher. Tariffs alter supply chains. Government borrowing keeps expanding. Defense spending is exploding throughout NATO. Europe is constructing a war economy while sovereign debt continues to rise. Then central banks are expected to somehow neutralize all of this by moving an overnight interest rate up or down 25 basis points.
The CPI is telling us something far more important than whether inflation was 3.3% or 3.4%. The structure of inflation is changing. The easy post-pandemic explanation is finished. We are entering an environment where geopolitical instability, energy, sovereign debt, and declining confidence in government increasingly dictate capital flows and prices.
That is precisely the environment where the old economic theories begin to fail. The Fed cannot control war. It cannot control Congress. It cannot control the national debt. It cannot control global capital flows. Yet everyone will demand that it somehow control the consequences.