US Inflation Spikes as Trump Promises Payments Amid Rate Hikes

U.S. inflation accelerated in August, with the consumer price index rising 3.4% year-over-year and 0.4% from July. The spike was driven largely by a 3.9% monthly increase in gasoline prices and record diesel averages of $6.05 per gallon, resulting from expanded fighting between the United States and the Government of Iran. Other rising costs included airline tickets, hotel rooms, and wireless phone services.

Donald Trump responded to voter concerns ahead of the November midterm elections by promising $5,000 payments to every American adult if Republicans retain a congressional majority. To mitigate rising costs, Treasury Secretary Scott Bessent increased buybacks of Treasury bonds in an attempt to lower long-term interest rates. However, the housing market continued to weaken, with existing home sales falling for a third straight month and 30-year fixed mortgage rates hitting 6.76%.

The economic data has increased pressure on Federal Reserve Chairman Kevin Warsh to raise benchmark interest rates during the September 15-16 meeting. While Trump has previously demanded lower rates, economist Justin Wolfers noted that markets see an 86 to 87 percent probability of a hike. Wolfers argued that the Federal Reserve has little choice but to raise rates to combat inflation, which he linked directly to the administration's policy approach toward Iran.