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Bottom Line:
The August CPI report delivered a notable upside surprise on core inflation at +0.3% month-over-month. In our view, the accelerating pace of core inflation is problematic for a Fed that has been steadfast in its commitment to returning inflation to its 2% target. The broader August inflation data does little to quell fears as the narrative builds that inflation is becoming untethered. Consumer inflation expectations remain elevated on energy costs, business input costs continue to mount, and the components of PPI that matter most for the direction of core consumer goods are trending in the wrong direction. Core goods CPI was not massively problematic in August (+0.1% month-over-month), but all trends point to mounting risk, while the prospect of core services deflation remains extremely limited.
The inflation pipeline is heating up
Most problematic is the pipeline that is likely to keep inflation elevated in the months ahead. While headline price growth (+0.4% month over month) was largely an energy story, evidence that energy inflation is spilling over to other sectors is visible in the ISM prices-paid data (for both services and manufacturing) as well as the August PPI data. Put simply, business input costs are outpacing consumer prices, and those costs will need to be passed on to consumers; otherwise, firms risk margin compression.
Just look at the difference between price increases for food at home (+0.0% month over month) and food away from home (+0.3% month over month). It highlights how restaurants are facing higher input costs outside of food — wages for workers, utility bills, and transport and delivery costs all contribute to rising input prices.
The details showed few signs of deflation
Digging into the details of the August CPI report, the data were a mixed bag, but few sectors outright declined. While many tariff-exposed goods categories were benign (household furnishings and supplies, and apparel), others (new and used motor vehicles) showed clear signs of acceleration. And early spillover pressure from rising oil prices also showed up in higher airline fares.
Looking at core services, they accounted for the bulk of price pressures. Some of this is likely a one-off. Wireless telephone services surged +5.9% month over month, likely reflecting telecommunications firms raising plan pricing — for example, a major carrier announced the retirement of unlimited plans starting in August 2026. Within shelter, it was lodging away from home (i.e., hotels and dormitories) that posted the material upside (+2.4% month over month). Still, housing disinflation in owners’ equivalent rent and primary rent will be limited in our view.
The trends matter more than the details
We continue to expect core services to remain sticky and view core goods as the primary risk of re-acceleration relative to our inflation forecast, especially as higher energy prices and tariffs bleed through to other sectors. Recent trends are concerning: used motor vehicle prices rose +0.4% month over month for two consecutive months, and new motor vehicle prices (+0.3% month over month) appear to be following. Apparel and recreation goods are both up over 2% since January. Motor vehicle maintenance and repair prices continued to accelerate, and we expect this will add to auto insurance costs down the road. The road ahead for inflation will be bumpy, but the signs are pointing in the wrong direction.
Most core goods prices trending higher this year with little relief in sight
The goods inflation pipeline looks concerning
About the authors:
Mike Reid is Head of US Economics at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.
Carrie Freestone is a Senior US Economist at RBC. She is responsible for generating RBC’s US economic forecasts across GDP, employment, and inflation, and providing macro commentary through publications, presentations, and the media.
Imri Haggin is an US Economist at RBC, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.
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