Consumer price increases accelerated to 0.6 percent on the month in August from 0.2 percent in July, as expected, lifting the 12-month rate to 3.7 percent from 3.2 percent, slightly above Econoday's consensus estimate of 3.6 percent.

Excluding food and energy, prices were up 0.3 percent on the month, at the high end of expectations. The 12-month core rate came down to 4.3 percent from 4.7 percent, the lowest since September 2021, in line with expectations.

In remarks at the Jackson Hole Symposium on August 25, Fed Chair Jerome Powell stressed that inflation which at the time was 3.2 percent remained"too high", adding that policy makers are"prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective."

If inflation was too high at 3.2 percent, it certainly is at 3.7 percent, far above the 2 percent target. In fact, with today's data, Econoday's Relative Performance Index is at 27, consistent with building risks of monetary policy tightening. That being said, the further decline of the core inflation rate should bring some reassurance to the Fed, leaving room (as many expect) to wait for further data in the short term while also leaving the possibility of further rate hikes on the table beyond September.

Energy prices rose 5.6 percent on the month, with a 10.6 percent surge in gasoline prices accounting for over half of the total CPI monthly increase. Energy prices were still 3.6 percent lower than a year earlier. Food was up another 0.2 percent from July and 4.3 percent year-over-year, the lowest 12-month rate in two years.

Within the core categories, shelter, which rose for the 40th consecutive month, was the largest contributor to the core CPI advance. Shelter was up 0.3 percent on the month and 7.3 percent year-over-year. Rents were up 0.5 percent and owners' equivalent rent increased 0.4 percent. Other contributors to the month CPI gain included motor vehicle insurance, airline fares, personal care and new vehicles. Transportation services were up 2.0 percent on the month and 10.3 percent year-over-year. Also contributing to higher monthly prices, household furnishings and operations prices recovered 0.3 percent from July.

Services less rent of shelter, which roughly tracks non-housing service prices that the Fed is concerned about, accelerated by a sharp 0.5 percent on the month from 0.2 percent in the prior two months for the largest increase since 0.6 percent in January this year. Yet this annual rate slowed to 3.1 percent from 3.3 percent for its lowest reading in 2-1/2 years.

Core prices in August are expected to hold steady and modest at a monthly increase of 0.2 percent to match July's as-expected 0.2 percent increase. Yet overall prices, reflecting food and energy, are expected to rise 0.6 percent after July's 0.2 percent increase which was also as expected. Annual rates, which in July were 3.2 percent overall and 4.7 percent for the core, are expected at 3.6 and 4.3 percent respectively.

The CPI is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation for the consumer. Annual inflation is also closely watched.

The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-W). All urban consumers are a more inclusive group. The CPI-U is the more widely quoted of the two, although cost-of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.

The CPI is also available by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for many metropolitan areas. The regional and city CPIs are often used in local contracts.

The Bureau of Labor Statistics also produces a chain-weighted index called the Chained CPI. This measures a variable basket of goods and services whereas the regular CPI-U and CPI-W measure a fixed basket of goods and services. The Chained CPI is similar to the personal consumption expenditure price index that is closely monitored by the Federal Reserve Board.

The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 will not be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose 4.2 percent in the U.S. over 2007. To recoup your purchasing power, you would have to charge 4.2 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.