In August, core inflation rose by 0.3% month-over-month, exceeding the consensus estimate of 0.2%. The headline CPI increased by 0.4% month-over-month and 3.4% year-over-year. A significant driver was the supercore services category, which excludes energy and shelter, jumping by 0.5% compared to 0.2% in the previous month.
The Federal Reserve views supercore services as a proxy for labor market tightness, as sectors like medical care, airfares, and restaurant meals are labor-intensive. A sustained 0.5% monthly increase in this metric would annualize to approximately 6%, which is triple the Fed's 2% inflation target.
Following the release of the August data, market-implied probability of a rate hike at the upcoming September 15-16 meeting rose from 70% to approximately 90%. Fed Chair Kevin Warsh has indicated a readiness to take action if inflation remains elevated.
The August report follows a higher-than-expected Producer Price Index and rising oil prices. The San Francisco Fed has identified the persistence of supercore inflation as a primary factor complicating efforts to bring overall inflation down to target levels throughout 2026.
