Core CPI Eases as Inflation Pressures Remain Firm

This week’s economic data includes: (1) Consumer Price Index (CPI) for August,

(2) Producer Price Index (PPI) for August, (3) weekly initial jobless and continuing claims and (4) market trends across equities, oil and Treasury markets, including changes in Fed rate expectations and a preview of next week’s key economic releases.

 

KEY SUMMARY:

Sticky inflation just got stickier: August CPI came in firm across both headline and core measures, reinforcing the market’s higher-for-longer rate outlook and putting Chair Warsh’s data-driven Fed on a collision course with investors who now view a September rate hike as increasingly likely.

The August CPI report showed that inflation remained firm, with headline CPI increasing 0.4% month over month and 3.4% year over year. Higher energy prices were a key driver, as gasoline and fuel oil prices rose sharply during the month, while food inflation remained relatively subdued. Core CPI increased 0.3%, slightly above expectations, indicating that underlying inflation pressures remain persistent despite some moderation in select categories.

 

Core services inflation accelerated modestly, driven by higher shelter costs, lodging prices, airline fares, and other travel-related services. Meanwhile, technology-related goods continued to exhibit elevated price pressures, reflecting sustained demand associated with data center expansion and artificial intelligence infrastructure investments. Although some categories affected by memory shortages showed signs of moderation, technology-related inflation remains above historical norms.

 

The report reinforced market expectations that the Federal Reserve may need to maintain a restrictive policy stance for longer than previously anticipated. Under former Fed Chairs Bernanke, Yellen, and Powell, policymakers typically relied on extensive forward guidance to avoid surprising financial markets. Chair Warsh has adopted a more data-dependent approach, encouraging markets to focus less on Fed communication and more on incoming economic data. With inflation remaining firm and market-implied odds of a September rate hike approaching certainty, the upcoming retail sales report may prove pivotal in determining whether the Fed validates current market expectations at its next meeting.

 

Wholesale inflation reaccelerated in August as higher energy prices and transportation costs pushed headline PPI to 5.4% year over year, while persistent strength in technology-related goods tied to data center and AI infrastructure spending reinforced expectations that the Federal Reserve may need to keep monetary policy restrictive for longer.

Producer prices accelerated in August, with headline PPI increasing 0.4% month over month and 5.4% year over year, up from 4.8% in July. The increase was driven largely by a rebound in energy prices, as goods inflation rose 1.1% during the month. Energy prices increased 4.2%, led by gains in gasoline, natural gas, heating oil, and diesel fuel, while food prices rose a modest 0.1%. On a year-over-year basis, goods inflation accelerated to 7.7%, reflecting renewed pricing pressures from energy markets.

 

Services inflation remained firm but moderated slightly on a monthly basis, increasing 0.1% in August compared to 0.2% in July. Transportation and warehousing services rose 2.3%, reflecting higher fuel and freight costs, while trade services declined 0.2%. On a year-over-year basis, however, services inflation increased to 5.4% from 4.8% in July. Core PPI, which excludes food and energy, rose 0.2% during the month and 4.6% year over year, while Super Core PPI, which excludes food, energy, and trade services, increased 0.3% month over month and remained unchanged at 4.7% year over year.

 

Overall, the August PPI report highlighted renewed wholesale inflation pressures, driven primarily by higher energy costs and transportation-related expenses amid ongoing geopolitical tensions. At the same time, technology-related goods prices continued to experience significant increases, reflecting sustained demand associated with data center and artificial intelligence infrastructure investments. The firm inflation data reinforced market expectations that the Federal Reserve may need to maintain a restrictive monetary policy stance and increased the likelihood of an interest-rate hike at the September FOMC meeting.

 

The labor market continues to show remarkable resilience, with both initial and continuing jobless claims remaining near multi-year lows and below year-ago levels, reinforcing the view that layoffs remain limited and giving the Federal Reserve little reason to worry about weakening employment conditions.

The latest jobless claims data continued to point to a resilient labor market, with initial claims declining to 206,000 and remaining below year-ago levels for the 30th consecutive week, while the four-week moving average also trended lower. Continuing claims fell to 1.774 million, remained below expectations and year-ago levels, and the insured unemployment rate held steady at 1.2%, indicating that workers continue to find employment and layoffs remain limited. Overall, the report showed little evidence of labor market deterioration and suggests employment conditions remain healthy, providing no immediate cause for concern for the Federal Reserve.

 

Markets received a one-two punch from surging oil prices and firm inflation data, sending Treasury yields to multi-year highs, pushing Fed rate-hike expectations sharply higher, flattening the forward curve, and leaving investors increasingly convinced that interest rates will remain higher for longer despite a late-week rebound in equities.

Equity markets delivered modest losses during the holiday-shortened week as investors grappled with a challenging mix of rising oil prices, persistent inflation pressures, higher Treasury yields, and growing expectations for additional Federal Reserve rate hikes. Although stocks rebounded on Friday following a pullback in oil prices and a CPI report that was only slightly warmer than expected, the recovery was not enough to erase losses incurred earlier in the week. The Dow Jones Industrial Average led declines, while the Russell 2000 underperformed the major indexes, reflecting increased investor caution toward risk assets.

Energy markets were a major driver of sentiment during the week. Crude oil prices surged as ongoing Middle East tensions and attacks on Russian refining infrastructure heightened concerns about global supply disruptions. While prices eased modestly at the end of the week following reports that Iran planned discussions with Gulf states regarding shipping-lane security, both Brent and West Texas Intermediate (WTI) crude posted gains of nearly 9%, pushing WTI back above $100 per barrel and reinforcing concerns about inflationary pressures.

 

Treasury yields climbed to multi-year highs across the curve as investors responded to rising energy costs, firm CPI and PPI reports, and increasing odds of additional Fed tightening. The 2-year, 5-year, and 10-year Treasury yields all moved higher, with the 10-year yield reaching its highest level since October 2023. The sharp rise in yields reflected growing market conviction that inflation may remain elevated and that monetary policy could stay restrictive well into 2027.

 

Forward-rate markets reinforced this higher-for-longer narrative. Treasury forward rates increased substantially across all maturities between September 4 and September 11, with 3-year forward rates rising approximately 26 basis points, 5-year rates increasing 23 to 24 basis points, and 7-year rates climbing about 21 basis points. The larger increase in shorter-dated forward rates produced a modest bear flattening of the curve, signaling that investors are increasingly pricing in persistent inflation pressures and elevated policy rates over the next several years.

 

Interest-rate expectations shifted notably in a hawkish direction during the week. Whereas markets had been pricing in two 25-basis-point rate hikes a week earlier, investors now fully expect three hikes occurring in September and December 2026 and March 2027. The probability of a September hike increased from 62% to 88%, while markets also began assigning meaningful odds to a fourth rate increase later in 2027. Looking ahead, investors will closely monitor next week’s retail sales report, jobless claims data, housing indicators, and particularly the September FOMC meeting, which could provide further clarity on the Fed’s commitment to maintaining a restrictive policy stance.

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DETAILED ANALYSIS:

CPI – August Update: 

The Bureau of Labor Statistics (BLS) reported that consumer prices increased 0.4% month over month in August, following a 0.1% increase in July and matching market expectations. On a year-over-year basis, CPI increased 3.4%, unchanged from July and in line with expectations.

 

Notable contributors to the monthly increase included:

 

• Housing: +23.5%
• Gasoline: +37.1%
• Wireless telephone services: +19.2%
• Hotel and motel: +8.3%
• Airline fare: +7.1%
• Tuition, other school fees and childcare: +5.3%
• Dining out: +3.3%

 

Food Prices

Food inflation, which includes both grocery and restaurant prices, increased 0.1% month over month in August, unchanged from July. Grocery prices were flat during the month, following a 0.1% decline in July, as increases in eggs (+2.9%) and fats and oils (+1.5%) were offset by declines in milk (-1.2%), beef (-1.0%), and fresh fruits and vegetables (-0.7%). Food away from home increased 0.3%, matching the July increase. On a year-over-year basis, overall food inflation slowed to 2.7%, with grocery prices rising 2.2% and dining-out prices increasing 3.4%.

Energy Prices

Energy prices increased 2.1% month over month in August, reversing a 1.5% decline in July. The increase was driven primarily by higher energy commodity prices, including a 3.9% rise in gasoline prices and a 10.1% increase in fuel oil prices.

 

Within the services category, natural gas and electricity prices declined 1.1% and 0.2%, respectively, in August, following increases of 0.7% and 0.1%, respectively, in July.

 

On a year-over-year basis, energy prices increased 16.3%, led by gains in gasoline (+27.4%) and fuel oil (+52.0%).

 

Core Goods Prices (Excluding Food & Energy)

Core goods prices increased by 0.1% in August, down from 0.2% in July. Notable increases were recorded in technology and discretionary consumer categories, including personal computers and peripheral equipment (+3.8%), appliances (+1.3%), outdoor equipment and supplies (+1.0%), men’s apparel (+1.4%), sporting goods (+1.0%), recreational reading materials (+2.9%), and televisions (+1.4%).

 

Offsetting some of these gains were declines in computer software and accessories (-2.2%), furniture and bedding (-0.9%), toys (-2.3%), nonprescription drugs (-1.0%), and other video equipment (-6.1%). On a year-over-year basis, core goods inflation increased 0.7%, led by computer software and accessories (+25.4%), personal computers and peripheral equipment (+8.4%), apparel (+3.6%), and sporting goods (+5.3%).

 

Core Services Prices (Excluding Energy)

Core services prices increased 0.3% month over month in August, up from 0.2% in July. Shelter costs, which account for roughly 35% of the CPI basket, increased 0.3% following a 0.1% increase in July. Other notable monthly increases included hotel and motel (+2.7%), airline fares (+2.7%), car and truck rental (+2.2%), delivery services (+2.3%), and motor vehicle repair (+1.4%). Declines were recorded in moving, storage and freight expenses (-1.9%), tax preparation and accounting services (-1.6%), and motor vehicle insurance (-0.8%), which has now fallen for four consecutive months.

 

On a year-over-year basis, core services inflation remained at 3.0%, unchanged from July. Shelter inflation continued to moderate, easing to 3.0% from 3.2% in July. Other notable annual increases included airline fares (+23.4%), delivery services (+14.2%), postage (+12.7%), streaming and video services (+10.8%), and hospital services (+5.2%).

 

Core CPI (Excluding Food & Energy)

Core CPI increased 0.3% month over month in August, up from 0.2% in July and slightly above market expectations of 0.2%. On a year-over-year basis, core CPI increased 2.4%, compared with 2.5% in July, and was in line with market expectations.

 

Commentary

The August CPI report showed that inflation remains firm, with underlying price pressures strengthening modestly from the prior month. While much of the monthly increase was concentrated in several volatile categories, including gasoline, wireless telephone services, lodging, and airline fares, the report nevertheless suggests that inflation progress has stalled in recent months. Shelter costs also reaccelerated on a monthly basis, contributing to the increase in core services inflation.

 

At the same time, pricing pressures tied to data center and artificial intelligence infrastructure investments remained evident in several technology-related goods categories, including personal computers and related equipment. Although some categories affected by memory shortages, such as computer software and accessories, showed signs of moderation, overall technology-related inflation remains elevated relative to historical norms.

 

The report has reinforced market expectations of a 25-basis-point rate hike at the September FOMC meeting. Under former Fed Chairs Bernanke, Yellen, and Powell, policymakers generally sought to avoid surprising financial markets by providing extensive forward guidance and, at times, signaling policy intentions ahead of meetings through speeches, interviews, and other communication channels. Chair Warsh has adopted a different approach, emphasizing that markets should focus less on Fed guidance and more on incoming economic data. That philosophy is now facing an important test. With inflation remaining firm and market-implied odds of a September rate hike approaching certainty, a decision to leave rates unchanged could risk undermining market confidence in the Fed’s reaction function. Looking ahead, the upcoming retail sales report will be the final major economic release before the September FOMC meeting and may play a critical role in determining whether the Fed validates current market expectations or charts a different course.

 

PPI – August Update: 

The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) for final demand increased 0.4% month over month in August, the largest gain since May, following a 0.1% increase in July and matching market expectations. On a year-over-year basis, headline PPI rose 5.4%, accelerating from 4.8% in July and slightly exceeding expectations of 5.3%.

 

Goods Prices

Goods prices, which include food and energy, increased 1.1% in August, reversing a 0.4% decline in July. The increase was driven primarily by higher energy prices, which rose 4.2% following a 1.8% decline in July and accounted for roughly 73% of the increase in goods inflation. Gasoline prices increased 4.2%, while natural gas (+8.8%), home heating oil (+22.8%), and diesel fuel (+24.1%) posted notable gains.

 

On a year-over-year basis, goods prices increased 7.7%, up from 6.8% in July.

 

Food prices rose 0.1% month over month in August following a 0.1% decline in July. Notable changes included:

 

• Processed turkeys: -6.7%
• Grains: +4.3%
• Eggs: +32.2%

 

Excluding food and energy, core goods prices increased 0.2% in August, moderating from 0.3% in July.

 

Technology-related pricing continued to rise and remained elevated on a year-over-year basis:

 

• Electronic components and accessories: +3.4% MoM (+27.6% YoY)
• Computers and related equipment: +0.2% MoM (+22.5% YoY)

 

Services Prices 

Services prices increased 0.1% in August, slowing from a 0.2% increase in July. The gain was driven primarily by higher transportation and warehousing costs, while trade services declined.

 

On a year-over-year basis, services inflation accelerated to 5.4% from 4.8% in July.

 

Key components included:

• Trade services: -0.2% (vs. -0.1% in July), driven by declines in fuels and lubricants retailing (-11.3%), health, beauty and optical goods retailing (-3.6%), and apparel wholesaling (-2.5%).
• Transportation and warehousing services: +2.3% (vs. -1.1% in July), led by increases in airline passenger services (+4.2%) and truck freight transportation (+2.0%), reflecting higher fuel and operating costs.
• Other services (excluding trade, transportation and warehousing): unchanged at 0.0% (vs. +0.5% in July), with increases in legal services (+1.7%), hospital inpatient care (+0.5%), and hospital outpatient care (+0.4%), all of which feed into the PCE inflation measure.

 

On a year-over-year basis, this core services measure rose 4.5% in August, up from 4.0% in July.

 

Core and Super Core PPI

Core PPI, which excludes food and energy, increased 0.2% in August, down from 0.3% in July and below market expectations of 0.3%. On a year-over-year basis, core PPI rose 4.6%, up from 4.3% in July and in line with expectations.

 

Super Core PPI, which excludes food, energy, and trade services, increased 0.3% in August, down from 0.4% in July and in line with expectations. On a year-over-year basis, Super Core PPI remained unchanged at 4.7%, matching both July’s reading and market expectations.

 

Commentary

Wholesale inflation reaccelerated in August, driven primarily by rising energy prices and higher transportation and warehousing costs, reversing some of the moderation seen over the previous two months. The increase was largely attributable to higher fuel prices associated with renewed geopolitical tensions and supply concerns, which lifted both energy-related goods prices and transportation costs. The firm inflation data contributed to increased market expectations for a September FOMC rate hike.

 

At the same time, demand associated with ongoing data center and artificial intelligence infrastructure investments continued to exert upward pressure on technology-related goods prices. The sharp annual increases in electronic components, accessories, computers, and related equipment suggest that capital spending tied to data center expansion remains a meaningful source of inflationary pressure within the goods sector.

 

Weekly Jobless Claims – Week Ending September 5:

The Labor Department reported that initial jobless claims decreased by 1,000 to 206,000 for the week ended September 5, from a revised 207,000 the prior week and slightly above market expectations of 205,000. Initial claims have remained below year-ago levels for 30 consecutive weeks, underscoring the continued resilience of the labor market. The four-week moving average also declined by 1,500 to 206,000 and remains well below the 239,250-level recorded a year ago, indicating that layoffs continue to be limited.

 

Continuing claims, which measure the number of individuals receiving unemployment benefits and provide insight into workers’ ability to find new employment, declined by 1,000 to 1.774 million for the week ended August 29 (reported with a one-week lag relative to initial jobless claims), down from a revised 1.775 million in the prior week. The reading came in below expectations and remained well below year-ago levels. Meanwhile, the insured unemployment rate held steady at 1.2%, while the four-week moving average of continuing claims edged down by 1,750 to 1.779 million. Overall, the data continues to point to a healthy labor market, with little evidence of deterioration and no immediate signs of concern for the Federal Reserve.

 

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets posted modest losses during the holiday-shortened week, pressured by higher oil prices stemming from ongoing Middle East tensions, persistent inflation concerns, rising Treasury yields, and increasing expectations for additional Federal Reserve rate hikes. Markets rebounded on Friday, supported by a pullback in oil prices and a CPI report that came in slightly warmer than expected, but the gains were not enough to offset losses earlier in the week.

 

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -0.66% (weekly) & +13.30% (YTD), closing at 26,333
• S&P 500: -0.80% (weekly) & +11.85% (YTD), ending at 7,657
• Dow Jones Industrial Average: -1.57% (weekly) & +9.38% (YTD), closing at 52,573
• Russell 2000: -2.41% (weekly) & +17.00% (YTD), ending at 2,904

 

Oil Market

Crude oil prices rose sharply during the week, driven primarily by ongoing geopolitical tensions in the Middle East and continued attacks on Russian refining infrastructure. Prices pulled back modestly on Friday following reports that Iran planned to meet with Gulf states to discuss shipping-lane security, but gains for the week remained substantial. As a result, Brent crude increased $8.33, or 8.7%, to $104.61 per barrel, while WTI crude rose $8.57, or 9.4%, to $100.05 per barrel.

 

Treasury Market

Treasury yields moved higher to multi-year highs across all maturities, driven primarily by rising energy prices, firm wholesale and consumer inflation data, and increasing expectations of an additional Federal Reserve rate hike. The 10-year Treasury yield reached its highest level since October 2023, reflecting growing market concerns that inflation may remain elevated and that monetary policy could stay restrictive for longer than previously expected.

 

Key Treasury Yield Movements:

• 2-year yield: 4.63% (+0.26%)
• 5-year yield: 4.78% (+0.24%)
• 10-year yield: 4.96% (+0.18%)

 

As shown in the table below, the Treasury forward curve shifted materially higher between September 4 and September 11, with a broad-based increase across all maturities and forward periods. The 3-year Treasury forward curve experienced the largest move, rising approximately 26 basis points across the curve, while 5-year forward rates increased by roughly 23 to 24 basis points and 7-year forward rates rose by about 21 basis points. Although rates moved higher across the entire curve, the larger increase in the 3-year sector relative to the 7-year sector resulted in a modest bear flattening of the forward curve.

 

This shift suggests markets significantly increased their expectations for near- and intermediate-term interest rates, reflecting a growing belief that policy rates may remain elevated for longer than previously anticipated. The more pronounced rise in 3-year forward rates relative to longer maturities indicates investors are pricing in greater persistence of inflation and restrictive monetary policy over the next several years. As a result, the spread between 3-year and 7-year forward rates narrowed modestly, producing a flatter forward curve and reinforcing the market’s higher-for-longer interest rate outlook.

 

Forward Date	3-Year 9/4/26	3-Year 9/11/26	Change (bps)	5-Year 9/4/26	5-Year 9/11/26	Change (bps)	7-Year 9/4/26	7-Year 9/11/26	Change (bps)
Spot	4.447%	4.713%	+26.6	4.544%	4.782%	+23.8	4.653%	4.867%	+21.4
09/30/26	4.471%	4.732%	+26.1	4.562%	4.796%	+23.4	4.668%	4.878%	+21.0
10/31/26	4.495%	4.759%	+26.4	4.581%	4.816%	+23.5	4.684%	4.895%	+21.1
11/30/26	4.517%	4.782%	+26.5	4.599%	4.833%	+23.4	4.700%	4.909%	+20.9
12/31/26	4.533%	4.801%	+26.8	4.613%	4.849%	+23.6	4.712%	4.922%	+21.0

 

Rate Expectations

A week ago, markets were pricing in two 25-basis-point rate hikes, expected in October 2026 and March 2027. Over the past week, however, expectations shifted in a more hawkish direction amid persistent inflation concerns. Markets now fully price in three 25-basis-point rate hikes, anticipated in September and December 2026 and March 2027. In addition, the implied probability of a rate hike at the September meeting increased to 88%, up from 62% a week earlier. Beyond March 2027, markets continue to price in additional policy tightening, with a 50% to 70% probability of a fourth 25-basis-point rate hike between June and December 2027.

 

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

 

Date	Economic Release	Expected	Prior
9/15 (Tue)	ADP Weekly Employment (Aug 29)		12K
	Empire Manufacturing (Sep)	15.0	20.6
9/16 (Wed)	MBA Mortgage Applications (Sep 11)		-2.7%
	Retail Sales (Aug)	0.8%	-0.6%
	FOMC Rate Decision (Upper Bound)	4.00%	3.75%
9/17 (Thu)	Initial Jobless Claims (Sep 12)	208K	206K
	Continuing Claims (Sep 5)	1.780MM	1.774MM
	Housing Starts (Aug)	1,315K	1,239K
	Building Permits (Aug)	1,405K	1,433K

 

For a visual representation of this week’s economic review, you can view or download the slide deck here: 09.11.2026 CBC Weekly Economic Update Presentation Slides

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Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

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