Inflation Was 3.4% in August, With Gasoline Prices Still Elevated -- WSJ

By Justin Lahart

The inflation rate held steady at 3.4% in August, the Labor Department said Friday.

That matched analyst expectations and was even with July's 3.4%.

What this means for the Fed

The August inflation reading has big implications for a Federal Reserve that has been sharply divided over whether it should raise rates at its policy-setting meeting next week. At the Fed's last meeting, in July, three officials dissented in favor of raising rates, and others have since said they could join them if inflation doesn't improve. Heading into Friday's report, interest-rate futures implied there was a two in three chance the central bank would increase its target range on overnight rates by a quarter point.

AI and tariffs

Adding to the inflationary pressure, the artificial-intelligence build-out has led to shortages of memory and storage chips, and that in turn is driving up prices for some consumer electronics items. Apple, for example, is raising prices to offset higher costs. The new, foldable phone it unveiled this week starts at $1,999.

Economists think that tariffs might have put some upward pressure on prices in 2026, as some businesses such as clothing retailers waited until the new year to pass on higher costs. Newly imposed tariffs on Canadian goods could further raise consumer prices on some items in the months ahead.

Where do prices go from here?

Economists are often in the habit of "looking through" inflation increases that come as a result of temporary shocks, such as rising gasoline prices. That is because if prices merely stabilize, the impact on overall inflation will fade.

But high fuel prices can spill over into prices for other items as well. Diesel averaged a record $6.06 a gallon on Friday, up from $3.71 a year earlier. That is adding to the cost of transporting goods, and at least some of that cost increase will likely get passed on to consumers. Meanwhile, the U.S. trade conflict with Canada risks making the impact of tariffs on inflation more protracted, and the AI build-out is, if anything, accelerating.

Self-fulfilling inflation

The biggest worry is that current, elevated inflation levels could work their way into people's inflation expectations-which can in turn affect future inflation. If workers believe inflation will remain high, for example, they can push for wage increases beyond the price increases they have already seen. Similarly, businesses will raise prices in an effort to offset the higher costs they expect to pay.

During the sharp rise in inflation that occurred after the pandemic hit, inflation expectations remained low. In recent research, economists Ulrike Malmendier and Stefan Nagel argue that came about because the years of low inflation that preceded the pandemic conditioned people to think the inflation run-up wouldn't last.

They caution, however, that a second bout of high inflation could have a more pronounced effect. So far, that hasn't happened, with surveys of consumers showing that inflation expectations remain relatively low. But Fed policymakers are facing a situation where the longer inflation stays elevated, the more of a problem they might face.

Write to Justin Lahart at Justin.Lahart@wsj.com

(END) Dow Jones Newswires

September 11, 2026 08:33 ET (12:33 GMT)