The U.S. Inflation “Counterattack”: Rising Oil Prices and AI Driving Up Prices; The Fed Is Very Likely to Raise Interest Rates Next Week
Hello, everyone. I’m your financial journalist.
Today, we’re discussing news that has the global markets on high alert. In short, U.S. prices have started to rise again, and the increase is more significant than expected. This has led to a likely outcome: the Federal Reserve (the U.S. central bank) is very likely to raise interest rates next week.
For ordinary people, higher interest rates mean more expensive borrowing, potentially higher mortgage payments, and possible pressure on the stock market. However, behind this situation in the U.S. lie broader issues such as an energy crisis, the costs associated with the AI industry, and complex political dynamics.
Below, I’ll break down this news into five key points to explain what’s happening and what the implications are in plain language.
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1. Oil Prices: The Main Culprit
First, let’s identify the primary driver of these price increases: energy, especially gasoline and diesel.
The news reports that the U.S. Consumer Price Index (CPI) rose by 0.4% month-on-month in August. At first glance, 0.4% might not seem like much, but the details are crucial: gasoline prices soared by 3.9%.
Why such a sharp increase in gasoline prices? It’s due to the escalating conflicts in the Middle East, which have driven up crude oil prices. Imagine going to the gas station and finding that the price has gone up significantly overnight.
- Gasoline: After two consecutive months of decline, gasoline prices rebounded, contributing more than a third to the month’s CPI increase.
- Diesel: Even more dramatic, with a month-on-month increase of 9.6% and a year-on-year increase of 44%! The average price of diesel in the U.S. has now reached $6.05 per gallon, up more than 60% from last year.
What does this mean for ordinary people?
Diesel prices are not just a concern for truck drivers. Road and rail transportation in the U.S. rely heavily on diesel. When diesel gets more expensive, shipping costs rise. To maintain their profits, businesses pass on these costs to the prices of the goods they sell. As a result, the clothes you buy, the vegetables you eat, and the daily necessities you use may all become more expensive due to the increased shipping costs. This is what’s referred to as “inflationary pressures spreading throughout the economic chain.”
2. Rising Core Inflation
Some might argue, “Oil prices are volatile; let’s exclude them and look at ‘core inflation’ (which doesn’t include oil and food prices).”
Unfortunately, core inflation is also on the rise:
- Core CPI rose by 0.3% month-on-month, higher than the market’s expected 0.2%.
- Although the year-on-year increase has slightly decreased from 2.5% to 2.4%, the accelerating month-on-month growth is a concerning sign.
Specifically, what’s increasing in price?
- Airline tickets: Up 2.7% because airplanes use jet fuel, and higher oil prices mean more expensive flights.
- Accommodation: Hotel room prices rose by 2.4%, and rent increased by 0.2%.
- Education and communications: These costs are also steadily rising.
This indicates that inflation is not just a problem with energy; it’s spreading to other areas. It’s like an infection in the body that’s starting to affect surrounding tissues. The Fed is most worried about this kind of spread because it makes inflation more persistent and harder to control.
3. The New Variable: The AI Boom Driving Up Prices
This is a relatively new and often overlooked factor: the expansion of the AI industry is becoming a new source of inflation.
The news highlights an astonishing statistic: Prices of computer software and accessories rose by 25.4% year-on-year, the largest annual increase on record. Computers and smart speakers also saw a 8.4% increase.
Why? Because AI is so popular that there’s a huge demand for high-performance chips, servers, and software. The surge in demand has pushed up the cost of production:
- Apple’s example: When Apple released its new iPhones, older models saw price increases of $100, mainly due to higher chip costs.
- Chain reaction: More expensive chips → more expensive computers, phones, and servers → higher costs for businesses purchasing IT equipment → these costs are eventually passed on to consumers.
Previously, we thought technology products were associated with deflation (newer models becoming cheaper). But now, due to the intense demand for computing power driven by AI, technology hardware has become a driver of inflation. This is a completely new economic phenomenon that the Fed must take into account when formulating its policies.
4. The Fed Is Very Likely to Raise Interest Rates Next Week
Based on the data, market traders have already made their bets: the probability of the Fed raising interest rates next week is as high as 90%.
What does this mean?
- The first tightening in over three years: The Fed will shift from a policy of lowering interest rates (or maintaining low rates) to raising them.
- It’s not just a one-time increase: The market is concerned about whether interest rates will be raised multiple times.
- The Bank of Montreal predicts that if rates are raised in October and December, there could be three increases this year.
- This could potentially offset the effects of the interest rate cuts implemented by former Fed Chairman Powell in 2025.
Why is the Fed doing this?
Fed Chairman Powell said, “If we’re not sure inflation will return to the 2% target, we still have work to do.” Current inflation data, especially core inflation and energy-related inflation, shows that inflation is not behaving as expected. The Fed needs to raise interest rates to increase the cost of borrowing, thereby slowing down consumption and investment and bringing prices under control.
5. Political Dynamics: Trump’s Anger and the Central Bank’s Independence
Finally, let’s talk about the political factors behind these rate hikes.
U.S. President Donald Trump has been advocating for lower interest rates from the Fed:
- Lowering borrowing costs: To make it easier for businesses to expand and to boost the stock market.
- Political considerations: High living costs can erode Trump’s support and even lead to the Republicans losing control of Congress in the midterms in November.
Therefore, Trump has been pressing the Fed to avoid raising interest rates.
But will the Fed listen?
Probably not. Several Fed officials have stated that they support rate hikes if inflation data continues to be poor. Next week’s meeting could be a critical moment for the Fed to show its independence from political pressure.
What does this mean for us?
- Central bank independence is crucial: If the Fed cuts rates to appease politics, inflation could get out of control, harming consumers’ wallets.
- Global implications: Higher U.S. interest rates usually strengthen the dollar, causing other currencies to weaken and capital to flow from emerging markets to the U.S. This can cause volatility in global stock and bond markets.
- Stay tuned: Next week’s Fed statement will be very important. It will not only determine whether rates are raised but also provide insights into future interest rate trends. If it suggests further rate hikes, global asset prices could face even greater pressure.
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Summary
In August, U.S. inflation data presented a challenging situation for the Fed: Rising oil prices due to conflicts in the Middle East, the demand for AI-driven technology products, and increasing core inflation.
The Fed is very likely to raise interest rates next week, and the market fears that this might just be the beginning, with more hikes possible throughout the year. Although this will displeasure President Trump, the Fed may choose to ignore political pressure to control inflation and maintain the credibility of the dollar.
For ordinary people, this means a more tense global financial environment, higher borrowing costs, and increased volatility in the investment market. We need to closely monitor next week’s Fed meeting and their guidance on future interest rate trends.