Middle East fighting fuels U.S. gas surge and new inflation fears

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% 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% from July to August, up from an increase of just 0.1% 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. Friday’s report increases pressure on the inflation-fighters at the Federal Reserve to boost the benchmark interest rate at a meeting next week, which could lift mortgage and auto loan costs in the months ahead.

Federal Reserve Chair Kevin Warsh and other officials “signaled that interest rates can remain on hold only if disinflation continues and today’s August report did not deliver that,” said Kathy Bostjancic, chief economist at Nationwide.

Worsening inflation isn’t all due to spiking gas costs. Prices for appliances, car repairs and wireless phone services also jumped last month. And economists worry that more expensive fuel can spill into other parts of the economy. For example, diesel prices have hit record highs above $6 a gallon, which pushes up the cost of shipping for groceries and other goods delivered by truck.

Airline tickets rose 2.7% on a monthly basis, according to the new data, and have soared more than 23% from a year earlier.

Excluding the volatile food and energy categories, core prices were 2.4% higher in August than a year ago, down slightly from July’s 2.5% and the third straight decline. But on a monthly basis, core prices rose 0.3% 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 higher interest rates. Wall Street investors now see a more than 80% chance that the Fed will increase rates Sept. 16, according to CME Fedwatch, a 10-point jump from Thursday.

The Trump administration is seeking to counter voter concerns about high prices and rising interest rates. 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, though it declined in early trading Friday to a still-elevated 4.9%.

What has gotten more expensive

Gas prices jumped 3.9% just from July to August, Friday’s report said, leaving gas prices more than 27% higher than a year earlier. Prices at the pump have jumped further this month, which means inflation is likely to worsen next month. The nationwide average cost of a gallon of gas on Friday leapt more than 7% from a month ago to $4.30.

In addition to rising plane tickets, hotel room prices climbed 2.4% just from July to August and are 3.2% more expensive than a year ago. Wireless phone services, appliances, and car repairs also got more expensive last month.

Apparel and grocery prices were unchanged from July to August, providing some relief to consumers, though eggs moved 2.9% higher last month. They are still down sharply from a year earlier.

Inflation as one-time shock or something more

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 centers. 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. “It’s unclear when tensions in the Middle East are going to settle down. ... This seems like it could be a prolonged disruption.”

While core prices are rising more slowly than overall prices, more expensive oil and gas could spread through more of the economy. Pricier jet fuel will likely push airfares even higher, and more expensive diesel will raise shipping costs, which could make groceries and other goods shipped by train and truck more expensive. On Thursday, a wholesale price report showed a jump in chemical prices, likely a result of more expensive oil.

Federal Reserve widely expected to lift rates

Friday’s report has spurred many economists to pencil in a rate hike at the Fed’s next meeting Sept. 15-16. Chair Warsh suggested he was leaning toward a rate hike in a high-profile speech two weeks ago, but he did not commit to doing so at a specific time.

Warsh has said he doesn’t want to tip his hand about his next moves, leaving some uncertainty going into the meeting.

The Fed left its key rate unchanged at its last policy meeting in late July, but three officials voted in favor of hiking by a quarter point, which would have increased it to about 3.9% from 3.6%.

Rugaber writes for the Associated Press.