Annual all-items inflation rose to 2.9%, the highest level since January
By David Enna, Tipswatch.com
In what could be a crucially important report, the Bureau of Labor Statistics reported today that seasonally adjusted U.S. inflation rose 0.4% in August, higher than expected. The annual rate rose to 2.9%, up from 2.7% in July.
Core inflation, which removes food and energy, rose 0.3% for the month and held steady at 3.1% for the year. This matched expectations — meaning that overall this report should not raise market alarms. However, U.S. inflation remains too high.
The BLS noted that shelter costs rose 0.4% for the month, the highest monthly rate since January. The annual rate fell from 3.7% in July to 3.6% in August. More from the report:
- Food at home costs rose a troubling 0.6% for the month and are now up 2.7% year over year. The index for fruits and vegetables rose 1.6% for the month. Costs for meats, fish and eggs have increased 5.6% over the last year.
- Gasoline costs increased 1.7% in August after falling 1.9% in July. Gas prices are down 6.6% over the last year.
- Costs of new vehicles, which have been fairly stable throughout 2025, rose 0.3% for the month and are now up 0.7% for the year.
- Costs of used cars and trucks popped 1.0% higher for the month and are up 6.0% for the year.
- Medical care services costs fell 0.1% for the month but are up 4.2% year over year.
- Airline fares rose 5.9% in August, after rising 4.0% in July.
- Apparel costs rose 0.5% for the month but are up only 0.2% year over year.
Overall, this August report shows inflation continuing to run at a fairly high level, but so far there appears to be no dramatic “instant” effect from U.S. tariffs on imports. Here is the trend for all-items and core inflation over the last year, showing the steady march higher in all-items inflation since April:
What this means for TIPS and I Bonds
Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances for TIPS and set future interest rates for I Bonds. For August, the BLS set the inflation index at 323.976, an increase of 0.29% over July.
For TIPS. The August report means that principal balances for all TIPS will increase 0.29% in October, after rising 0.15% in September. Here are the October Inflation Index Ratios for all TIPS.
For I Bonds. The August report is the fifth of a six-month string that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset November 1 and eventually roll into effect for all I Bonds. Inflation from April to August has increased 1.31%, which would translate to a variable rate of 2.62%. One month of data remains and we are probably looking at a new variable rate of 3.0% to 3.2%, higher than the current 2.86%.
What this means for the Social Security COLA
The Social Security cost-of-living adjustment is based on an unusual inflation index – CPI-W – and is determined by averaging the indexes for July, August and September and comparing that number to the same average for the year before. For August, the BLS set the CPI-W index at 317.306, an increase of 0.30% over the June number.
With one month to go, here is where we are:
We are probably looking at a COLA of 2.7% once the September number rolls out on October 15. There is still a shot that my projection of 2.8% will work out.
What does this mean for future interest rates?
Although U.S. inflation remains too high, I believe the Federal Reserve will move forward with a 25-basis-point cut to short-term interest rates next week. A cut of 50 basis points should off the table. From this morning’s Bloomberg report:
While the report underscored that inflation remains above the Federal Reserve’s target, the reassurance that tariff hikes aren’t obviously sparking a generalized escalation in price pressures reinforced expectations for Fed policymakers to cut interest rates by 25 basis points at the Sept. 16-17 meeting.
From the Wall Street Journal:
In recent weeks, more Fed officials, including Chair Jerome Powell, have suggested that softer labor market conditions should give the Fed more comfort that they can assume price increases will be a one-off. … (T)he overall inflation picture in the first six months of the year wasn’t as ugly as many feared it would be in the wake of the tariff increases.
So it is highly likely that a rate cut is coming next week. What happens next will depend on the status of the U.S. job market.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
