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This morning, the Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) data. The headline CPI came in at 0.4% month-over-month, 3.4% year-over-year, while Core CPI (not including food and energy) came in at 0.3% month-over-month and 2.4% year-over-year.1
Another data release published on Thursday - the Producer Price Index (PPI, the price that sellers receive) - also came in hot. Headline PPI came in at 5.4% on a year-on-year basis, while Core PPI came in at 4.7% year-on-year.
Although CPI is not the main inflation measure used by the Federal Reserve - that is the Personal Consumption Expenditure Price Index (PCE) - the CPI and PPI data feed heavily into PCE. Based on the releases so far, forecasters are assuming a high print for August PCE as well.
Moreover, the latest PCE readings for the month of July were far above the Federal Reserve target of 2% - headline PCE was 3.7%, while Core PCE was 3.3%. With inflation being above target, the focus has turned to the interest rate decision that will be made on September 16, 2026 by the Federal Reserve. The big questions are whether the Federal Reserve will hike, and whether they should hike.
Below I lay out how to think through this decision using a standard economic model. I will also address why I think many opinions are off the mark in this current interest rate discussion:
“It’s a supply shock, we shouldn’t hike into a supply shock”
“Inflation is actually low and falling so we shouldn’t hike”
“The labor market is weak and thus we shouldn’t hike”
What you’ll find below:
Why I believe that the standard economic models suggest an interest hike is needed;
What are the primary reasons of current inflation pressures;
My responses to common opinions on current inflation and interest rates.
