INFLATION WATCH! Will August's 0.4% be the "good old days" vs what's coming?

Many were waiting for Friday’s Consumer Price Index report, as prices of gasoline and other products had risen in much of America in August. And it was the last major economic report from the Bureau of Labor Statistics before the Federal Reserve makes their decision on interest rates next week.

Well, the report came out and…. inflation had yet to spiral.

The consumer price index rose a seasonally adjusted 0.4% for the month, putting the 12-month increase at 3.4%, the Bureau of Labor Statistics reported Friday. Both readings were in line with the Dow Jones consensus.

However, stripping out volatile food and energy prices, the core CPI posted a 0.3% monthly gain, or 0.1 percentage point higher than forecast. The core annual rate came in at 2.4%, matching the estimate.

Dig into the actual CPI report, and you’ll see that one reason prices didn’t go up by more than 0.4% overall was because grocery prices (aka – “food at home”) were flat in August after a 0.1% drop in July.

Doubly interesting is that a main reason behind the flattening in grocery prices comes from beef, whose prices that President Trump wants to cut even further with less safe and imported meat.

Change in prices, beef and veal
July -0.8%
Aug -1.0%
Aug 2025-Aug 2026 +5.9%

So is the BLS part about food prices BS? Or is the Trump Administration behind the curve of something that was already happening, and now will overcorrect and crash prices for American producers?

The CPI report came one day after the Bureau of Labor Statistics said that Producer Prices had risen at a similar rate.

The producer price index, a measure of final demand costs for goods and services, increased a seasonally adjusted 0.4% for the month, in line with the Dow Jones consensus, the Bureau of Labor Statistics reported.

On an annual basis, that put the PPI at 5.4%, still well above the Fed’s 2% inflation target and 0.1 percentage point higher than expected. The PPI rose 0.1% in July, a slight upward revision from the original estimate of no change.

Excluding food and energy, the core PPI accelerated by 0.2%, against the forecast for a 0.3% increase. Core less trade services, another volatile category, was up 0.3%, in line with estimates…..

There were further signs of pipeline pressures: Processed goods prices increased 1.8% while unprocessed goods accelerated 1.1%.

But the increased costs at the start of the product pipe3line has yet to show up on store shelves, apparently.

Do I buy it? I’d say I’m confused by the disconnect where businesses keep reporting higher prices for the products they get, the costs of transport run higher, this is somehow not passed on much to the consumer, but profits go through the roof. Yes, some of that is theft using gains of increased worker productivity, but given the wide gap between prices only going up by 3-4% while profits and margins rise by double digits, it also seems to be something else that is not apparent in the data.

Even with inflation staying at 3.4% year-over-year, wage growth still was lower than that over 12 months, making year-long real earnings negative for the 3rd month in a row.

Everyday Americans certainly don’t think things are getting better, as consumer sentiment is back in the bad place it was when gas prices first spiked up this Spring.

The University of Michigan's Surveys of Consumers said its Consumer Sentiment Index dropped to 47.8 this month ⁠from 51.7 in August. Economists polled by Reuters had forecast the index at 51.0. Sentiment sagged among consumers identifying as Democrats and Republicans, but was little changed among Independents.

"With a resurgence in fuel prices and trade tensions, consumers anticipate greater pressures on their pocketbooks ‌to ⁠come," said Joanne Hsu, the director of the Surveys of Consumers.

The survey's measure of consumer expectations for inflation over the next year jumped to ⁠4.6% from 4.0% last month. Twelve-month inflation expectations were at 3.4% in February before the U.S.-led war with ⁠Iran started. Consumers' expectations for inflation over the next five years edged up 3.4% from ⁠3.3% in August. They are higher than their 2024 range of 2.8% to 3.2%.

By the time we get to the October surveys, a whole lot of Americans are likely to be notified of higher health insurance premiums, so I can’t imagine they’d be feeling better by that point. And with nationwide diesel prices rising to more than $6 a gallon (as it did on Friday), that'S going to be passed through to other products at some point, doesn’t it?

We might well look back to the 3.4% year-over-year CPI figure that was reported for August as a goal to fall back toward for 2027. And how much longer are Americans going to keep up their strong consumer spending when wages keep failing to keep up with those higher prices? Especially if the Bubbly stock market makes a correction back toward reality?