The one price spike the Fed can't control: An inflation explainer

Prices rose 3.7 percent over the past year, the fastest pace since May and an uglier number than President Joe Biden was hoping to see.

But the government's latest consumer price index report on Wednesday is unlikely to cause panic at the Federal Reserve, which will decide next week whether to further raise interest rates. That's because the CPI increase in August was driven by a surge in fuel prices, and there's not much the Fed can do about that.

Still, if the central bank continues its rate-hike campaign in the coming months and weakens the job market, that will not only slow spending but might have an outsize effect on consumers, who will face sky-high interest rates on their credit card debt. And all of those factors could converge in an unpleasant way for Biden ahead of the 2024 presidential election.

Let’s dig into what we learned in the report.

Why did the inflation number jump?

Gas prices drove more than half of the increase in the CPI, while inflation across all categories rose 0.6 percent from July to August — the highest since the summer of 2022. Higher fuel costs likely also fed cost increases in some other sectors such as plane fares, which rose nearly 5 percent after falling the previous couple of months.

Prices at the pump have more recently leveled off, but energy costs are unpredictable and could continue to be a dangerous counterweight to the Fed’s efforts to cool prices.

Does this mean that inflation is not yet under control?

It’s hard to say for certain, but there’s at least some good news in this report. So-called core inflation — which strips out volatile food and energy prices — is considered a more useful measure of where prices are headed. And it rose 0.3 percent in August, the third month in a row that core prices increased at a more normal pace. Indeed, on an annual basis, core inflation dropped from 4.7 percent to 4.3 percent — still way above the Fed’s 2 percent target, but you could get there over time if this range of inflation continues.

A big chunk of core inflation at the moment is rent, which for many Americans has gone up aggressively. But newer leases suggest rent increases have decelerated. Because rents generally change on an annual basis, and rents for the same homes are only tracked every six months, it can take a while for that data to feed into CPI, but the hope is that this trend of housing costs boosting inflation will slowly fade.

It seems like there are so many different ways of slicing inflation — overall, core, annual, monthly. What’s the most useful one?

It depends on what you’re trying to measure. If you want to know how much your cost of living has gone up over the past year, annual inflation is the best measure. In this case, that’s the 3.7 percent number. But looking at just the past three months, you get a much clearer picture of what the current trend is; a lot of what annual inflation tells you is what was happening last year, which is old news at this point.

That’s also why the Fed likes to look at core inflation. It’s not that food and gas aren’t important costs — they're obviously among the most crucial items to consumers. It’s just that they’re not necessarily as good an indicator of what’s going to happen next. And the last three months, core inflation has come in at very tolerable levels: 2.4 percent. The hope is that that trend holds.

Will the Fed raise interest rates next week after this report?

Most likely not. Central bank policymakers are still leaving the prospect of more rate hikes on the table, but they’re expected to skip at least September because they want more data to see whether inflation continues to slow. At this point, the Fed has already raised borrowing costs to punishing levels, so even holding rates where they are should continue to slow the economy and, ideally, inflation. And this isn’t the kind of report that suggests urgent action to do even more is needed.