Consumer Price Index August 2026

Living on the edge

Headline CPI rose 0.4% month over month (m/m) in August following a muted 0.1% gain in July, while annual headline inflation remained flat at 3.4%year over year ( y/y). Energy prices rebounded 2.1% m/m led by higher diesel and gasoline prices. Food prices only rose a modest 0.1% m/m with flat grocery prices offsetting a 0.3% increase in restaurant prices.

Core CPI came in a smidge over consensus at 0.269% m/m, rounding to 0.3%, but core inflation edged down a tick to 2.4% y/y – a post-pandemic low – on favorable base effects. Looking beneath the surface, core goods prices only rose 0.1% m/m as modest gains in new and used cars were offset by flat apparel prices and lower medical commodities prices. The surge in computers and smart home device prices was offset by lower computer software and smartphone prices, but the relief is likely short-lived given ongoing pressure related to the AI-investment wave and the recent release of one of the most expensive smartphones to date.

Core services inflation accelerated, rising 0.3% on the month, driven by higher airfare and intra-city transportation costs, higher car rental and hotel prices, rising tuition cost (especially for early childhood), and the largest surge on record in cellphone services prices. Higher wireless services prices added 0.08 percentage points (ppt) to the monthly CPI gain and 0.1ppt to the core CPI advance. Rent and owners' equivalent rent both increased a modest 0.2% m/m, indicating ongoing housing cost disinflation.

Paradoxically, while core inflation edged down a tick to 2.4% y/y in August, the CPI data indicates the disinflation process is at risk. Higher domestic fuel prices feed directly into passenger and goods transportation costs, which will eventually get passed onto consumers. Supply chain disruptions and tariffs lead to higher traded goods prices that businesses will attempt to pass onto consumers. And the AI capex boom is increasingly pressuring hardware and software prices. Looking ahead, we foresee headline CPI inflation rising toward 3.6% y/y by year-end while core CPI inflation firms closer to 2.6% y/y.

This represents a key downside risk to the consumer spending outlook as inflation-adjusted wage growth contracted for a fifth consecutive month in August. This is the longest income squeeze since 2012 – excluding the post-pandemic period when public assistance kept income growing despite historical job losses.

We are changing our Fed call from a hold to a 25 basis points (bps) hike at the Federal Open Market Committee (FOMC) meeting next week. We think Christopher Waller and John C. Williams will argue in favor of a rate hike on the basis that the “speed” of the disinflationary process is not satisfactory. Regional Fed presidents Laurie Logan, Neel Kashkari and Beth Hammack, who recently dissented the July hold in favor of a hike, will again support a hike. With only one or two dissents favoring a hold, Chairman Kevin Warsh will likely use the cover of the majority to lead from behind and also vote for a hike.

Based on our recently upwardly revised inflation outlook, we expect the Fed will also raise the federal funds rate by 25bps in December.

In the details:

• Energy prices rose 2.1% m/m in August, led by a 3.9% increase in gasoline prices and a 10.1% jump in fuel oil prices. The rebound follows two months of energy-driven disinflation and reflects renewed pressure on fuel costs amid heightened tensions in the Middle East. By contrast, natural gas prices fell 1.1% m/m and electricity prices edged down 0.2%. However, the recent runup in energy prices points to renewed upside risks for utility costs and broader energy inflation in the months ahead.
  
  
• Food prices rose a modest 0.1% m/m, with grocery prices unchanged on the month and offsetting another 0.3% increase in restaurant prices. Grocery prices have remained surprisingly tame in recent months despite higher fertilizer, energy and transportation costs. Intense competition among grocers and increasingly value-conscious consumers have limited firms’ ability to pass higher input costs onto consumers.
  
  
• Core goods inflation remained relatively tame with a 0.1% m/m gain in August. New vehicle prices rebounded 0.3% while used vehicle prices rose another 0.4%. By contrast, apparel prices were unchanged and medical goods prices fell for an eighth consecutive month. Some technology-related goods remained a notable source of price pressure with computer prices rising another 3.8% m/m. Meanwhile, software prices fell for the first time since September 2025 though they remain up 25% over the past year. Strong investment associated with the AI buildout is increasingly fueling price pressures across parts of the AI ecosystem.
  
  
• Shelter inflation rose 0.3% m/m in August after two unusually soft 0.1% monthly readings, in line with our view that the recent weakness overstated the cooling in housing costs. The pickup in shelter inflation largely reflected a 2.4% m/m rebound in lodging away from home after an unusually weak stretch for hotel prices. Rent of primary residence and owners’ equivalent rent both increased 0.2% m/m, indicating underlying rent inflation remains contained.
  
  
• Transportation services prices increased 0.5% m/m, reflecting a sharp rise in airline fares and continued strength in vehicle maintenance and repair costs. Airline fares rose 2.7% following a 2.2% increase in July and are now up more than 23% from a year ago. Maintenance and repair costs climbed 1.1% on broad-based gains across categories. By contrast, motor vehicle insurance prices fell 0.8% for a third consecutive month. After driving a significant share of services inflation in recent years, auto insurance is now acting as a source of disinflation, with prices declining 5.1% on a year-over-year basis.
  
  
• Education and communication services jumped 1.8% m/m in August, reflecting higher tuitions – particularly for elementary and high school – and a sharp increase in telephone service prices. Tuition costs typically rise at the start of the academic year, but this year’s increase was stronger than in prior years. Telephone services also registered an outsized 5.9% m/m increase, which likely reflects some announced carrier plan repricing and fee increases in August. Given the category's increased volatility following the Bureau of Labor Statistics’ (BLS) methodology changes last year, we view the jump as largely idiosyncratic and expect at least a partial reversal in the months ahead.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.