Inflation report lands amid spiking oil prices, rising interest rates and Fed on fence

WASHINGTON (AP) — Friday’s inflation report is shaping up to be among the most consequential in years. Oil and gas prices have spiked again on the back of renewed combat in the Middle East. The Federal Reserve is considering whether to lift its short-term interest rate next week, with some officials saying Friday’s report could swing them either way.

And longer-term interest rates jumped Thursday, partly because of fears of higher inflation, pushing mortgage borrowing costs higher. The Trump administration is seeking to counter voter concerns about high prices and rising interest rates as the midterm elections approach. President Donald Trump on Wednesday promised $5,000 payments to every American adult if the GOP keeps a majority in Congress, a move that would require congressional approval and could stoke inflation.

And Treasury Secretary Scott Bessent has stepped up buybacks of Treasury bonds in an effort to keep longer-term interest rates lower. Yet on Thursday the yield on the 10-year Treasury reached a nearly three-year high. What’s coming Friday On Friday, the government is expected to report that headline inflation ticked down last month, to 3.3% from 3.4%, according to data provider FactSet, though that is still above the Fed’s 2% target.

And higher gas prices will likely push inflation back up next month when September’s data is released. On a monthly basis, prices are forecast to have risen 0.4% from July to August, a pace that if it continues would keep inflation far above 2%. Excluding the volatile food and energy categories, core prices are projected to have risen by just 0.2% from July to August and 2.4% last month from a year earlier.

The year-over-year figure would be down slightly from 2.5% in July. Yet the cooling in core prices may not sway the Fed or console many consumers. Renewed fighting in the Middle East has pushed up energy costs, with the nationwide average cost of a gallon of gas on Thursday jumping 7% from a month ago to $4.28.

Gas prices on Labor Day were at a record high for that date, and diesel fuel prices have reached all-time highs. Inflation as one-time shock, or something more Many economists and Federal Reserve officials have long considered higher gas prices one of several “one-time” shocks that are lifting inflation, along with tariffs and surging investment in AI data centers. For months, the hope has been as that a…