What just happened?

In just about all the ways you can look at it, US inflation was just hotter in August.

Headline inflation (an all-items view of US prices) rose more than expected on a year-over-year basis, climbing 3.7%, just a touch more than the 3.6% that was predicted. Viewed on a month-over-month basis, it rose perfectly in line with consensus at 0.6%.

Core inflation (a view that excludes food and energy) rose in line with expectations on a year-over-year basis at 4.3%, but a tad more than expected on a monthly basis, at 0.3% (versus 0.2%).

Supercore inflation (which excludes food, energy, and housing) posted its biggest monthly gain since March, meanwhile, with a 0.37% rise. It settled at 4.05% year-over-year.

What does it mean?

On the surface, it was a mixed report: higher gasoline prices pushed headline inflation higher, but rental prices – a huge driver of core inflation – piped down finally, posting their smallest increase since December 2021.

But if you peek beneath the surface, you see a slightly more worrying picture: transportation costs zoomed up in August, along with bills for medical care, water, trash collection, education, and communication.

And, no doubt the Federal Reserve (the Fed) will take a gander at all that once it’s had a closer look at supercore CPI, the central bank’s preferred gauge for measuring “true” inflationary pressures. It’s been on an upward trajectory for two months and is looming at a slightly menacing 4% yearly pace. This is way too high and sticky for the Fed, which has been beating back the country’s hot inflation with interest rate hikes for over a year now.

We've been saying this for a while: trimming inflation from its high was the breezy bit. The final stretch’s going to be a much tougher ask, especially with energy costs still keeping a heavy foot on the pedal.

Why should you care?

Well, it’s not (yet) time to panic: inflation’s still largely heading in the right direction, and this report alone is unlikely to force the Fed to hike again next week.

But the threat of a comeback of inflation makes policymakers’ job more uncertain, and hints at the potential for choppier waters ahead. Remember that most investors are still betting on inflation going back toward the Fed’s 2% target pretty quickly, a sentiment that’s echoed in stock prices. So any curveballs could ruffle investors' feathers, possibly sparking a market pullback. Simply put, don’t ignore the risk that inflation stays higher for longer – a scenario that's not too friendly to assets since it means interest rates will also stay higher for longer, dimming the glow of future earnings.