U.S. inflation remained stubbornly elevated in August, but consumers found at least a little relief in the grocery aisle.
The Consumer Price Index rose 0.4% in August and 3.4% from a year earlier, according to data released Friday by the U.S. Bureau of Labor Statistics. The annual increase was unchanged from July and matched economists’ expectations, while the monthly gain accelerated sharply from July’s 0.1% increase.
The culprit was largely energy rather than food. Gasoline prices jumped 3.9% during the month after declining in June and July and accounted for more than one-third of the overall monthly CPI increase. Other motor fuels, including diesel, surged 9.6%.
For food retailers and their customers, however, August offered a considerably quieter picture.
Overall food prices increased just 0.1% for the second consecutive month, while food-at-home prices — essentially the government’s measure of grocery inflation — were unchanged. That followed a 0.1% decline in grocery prices in July.
There was plenty of movement beneath that flat headline number. Fruit and vegetable prices declined 0.4% in August, including a 6.2% drop in lettuce prices. Egg prices, meanwhile, increased 2.9%, while dairy products and nonalcoholic beverages also became more expensive.
That makes August something of a good-news, bad-news report for the food trade. Grocery inflation was essentially nonexistent for the month, giving shoppers a respite after several years of sharply higher food costs. But the forces building outside the supermarket – particularly fuel and transportation costs – could make that relief difficult to sustain.
Diesel prices have reached record highs as oil prices climbed above $100 a barrel, raising transportation costs across a food supply chain that remains heavily dependent on trucking. Diesel prices have never been above $6.00 a gallon, ever. For an industry dependent upon trucks to deliver goods, this will be inflationary without a doubt.
Tariffs and other supply-chain pressures are adding a multitude of additional sources for inflation, while the broader inflation picture was even less reassuring.
Core CPI, which excludes volatile food and energy prices, increased 0.3% in August, its largest monthly gain since April and above economists’ expectations for a 0.2% increase. Core inflation nevertheless eased to 2.4% on a year-over-year basis from 2.5% in July. Higher airline fares, education and communication costs and used-vehicle prices contributed to the monthly increase.
The report also increased expectations that the Federal Reserve will raise interest rates at its Sept. 15-16 meeting. Fed-funds futures moved sharply toward a quarter-point increase following the CPI release, after markets had viewed the decision as considerably less certain only a day earlier.
The Fed has held its benchmark rate at 3.5% to 3.75% since December 2025. A September increase would mark the central bank’s first rate hike since July 2023. It remains to be seen which factors will be most at play when the committee meets. But we expect that volatility and probably our interest rates will stay elevated.
The forecast here is uncertain as we have a new Fed chair who has made a point of pointing out his mission to fight inflation – which means higher Fed Funds rates – and an administration that wants rates cut.
For the food trade, though, the most important number in Friday’s report is zero: grocery prices did not rise in August. The question is how long that can last with energy and transportation costs moving rapidly in the other direction.