Inflation pressures build
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Renewed inflation risks are complicating the economic outlook on both sides of the Atlantic.
- In the U.S., wholesale prices accelerated in August, boosting expectations for a Fed rate hike next week.
- In Europe, the European Central Bank raised rates for the second time since June as the Iran war keeps inflation risks tilted to the upside.
Why it matters: Inflation pressures were already building in August, and the latest surge in oil prices suggests there may be more to come. Brent crude blew past $105 a barrel, while the U.S. benchmark, West Texas Intermediate, topped $100 a barrel for the first time since May.
What they're saying: "The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects," ECB president Christine Lagarde told reporters this morning.
- Lagarde said eurozone growth has held up better than expected, helped by AI-related activity that the ECB expects will contribute to slightly higher core inflation.
By the numbers: U.S. wholesale prices rose 0.4% in August and 5.4% from a year earlier, largely reflecting higher energy costs.
- Goods prices jumped 1.1%, reversing two months of declines.
- Diesel surged 24% in a single month, accounting for more than a third of the goods increase and raising costs for moving goods.
- Transportation and warehousing costs gained 2.3%, a sign higher fuel costs may be bleeding into shipping.
Perhaps more troubling for the Fed is that some components that feed into its preferred inflation gauge, the Personal Consumption Expenditures Price Index, including airfares and hospital care, were firmer than expected.
- As we told you yesterday, next week's Fed decision could hinge on a few hundredths of a percentage point in August core PCE inflation.
What to watch: After this morning's Producer Price Index data, Bank of America now estimates that core PCE could rise by 0.26% — enough in its view to green-light a rate increase, though tomorrow's Consumer Price Index data could shift that estimate.
- CME's FedWatch tool puts the odds of a rate hike at the meeting concluding on Sept. 16 at about 70%, up from 60% before the PPI data.
