Inflation Report Lands Amid Turmoil    09/11 06:17

   Friday's inflation report is shaping up to be among the most consequential 
in years.

   WASHINGTON (AP) -- Friday's inflation report is shaping up to be among the 
most consequential in years.

   Oil and gas prices have spiked again on the back of renewed combat in the 
Middle East. The Federal Reserve is considering whether to lift its short-term 
interest rate next week, with some officials saying Friday's report could swing 
them either way. And longer-term interest rates jumped Thursday, partly because 
of fears of higher inflation, pushing mortgage borrowing costs higher.

   The Trump administration is seeking to counter voter concerns about high 
prices and rising interest rates as the midterm elections approach. 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.

   What's coming Friday

   On Friday, the government is expected to report that headline inflation 
ticked down last month, to 3.3% from 3.4%, according to data provider FactSet, 
though that is still above the Fed's 2% target. And higher gas prices will 
likely push inflation back up next month when September's data is released.

   On a monthly basis, prices are forecast to have risen 0.4% from July to 
August, a pace that if it continues would keep inflation far above 2%.

   Excluding the volatile food and energy categories, core prices are projected 
to have risen by just 0.2% from July to August and 2.4% last month from a year 
earlier. The year-over-year figure would be down slightly from 2.5% in July.

   Yet the cooling in core prices may not sway the Fed or console many 
consumers. Renewed fighting in the Middle East has pushed up energy costs, with 
the nationwide average cost of a gallon of gas on Thursday jumping 7% from a 
month ago to $4.28. Gas prices on Labor Day were at a record high for that 
date, and diesel fuel prices have reached all-time highs.

   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 up airfares, and more expensive diesel will raise shipping costs, 
which could make groceries and other goods shipped by truck more expensive. On 
Thursday, a wholesale price report showed a jump in chemical prices, likely a 
result of more expensive oil.

   What will the Federal Reserve do?

   Federal Reserve policymakers are split on whether to hike at a meeting next 
week, so much so that differences of a few hundredths of a percentage point in 
Friday's inflation report could determine whether the central bank boosts its 
benchmark interest rate or leaves it unchanged. The Fed, which is tasked with 
keeping inflation in check, typically lifts borrowing costs to slow spending 
and limit price increases.

   Investors and analysts differ over whether the Fed will hike rates at their 
Sept. 15-16 meeting. Chair Kevin 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.

   And last Thursday, Fed governor Christopher Waller, echoing some other Fed 
officials, suggested that if Friday's inflation report shows price increases 
cooling, then he would support keeping rates where they are. Waller is one of 
the 12 officials who vote on each Fed rate decision.

   Waller's heavy emphasis on August's figures has raised the stakes for 
Friday's report. If the monthly core figure rounds up to 0.3%, some Wall Street 
analysts expect the Fed would then hike rates. But if it rounded down to 0.2% 
or lower, then a hold could be more likely. If it is somewhere in between, it's 
not clear what the Fed may do. One analyst called such considerations 
"ludicrous precision."

   For his part, Warsh doesn't want to tip his hand about his next moves, which 
some economists say will make this kind of uncertainty more common before Fed 
meetings.