MICHEL MARTIN, HOST:
Pumped any gas lately? If so, then you know that energy prices are going up. A report from the Labor Department this morning shows that rising gas prices were a big driver of inflation last month. It is the last big economic report the Federal Reserve will see before policymakers vote next week on whether to raise interest rates. NPR's Scott Horsley is with us now to tell us more about this. Good morning, Scott.
SCOTT HORSLEY, BYLINE: Good morning, Michel.
MARTIN: Look, a lot of people have been experiencing pain at the pump lately. Tell us about this. What's going on?
HORSLEY: Yeah. The U.S. war with Iran has been heating up, and that has caused more volatility in the oil market. The price of Brent crude is back above $100 a barrel. The U.S. benchmark's just a little bit lower than that. And just this morning, AAA said the average price of diesel fuel had topped $6 a gallon for the first time ever. Tyrone Dozier (ph) was putting diesel in his RV a few days ago to run the engine and the air conditioner, and it took more than one swipe of his credit card just to pay for half a tank.
TYRONE DOZIER: My card ain't going to let me put above 175. I'll probably start over - put about - I might put 300 in here. Going down the road, my air conditioning is running off my generator. So I got to put a little extra for that.
HORSLEY: Rising gasoline prices accounted for more than a third of the overall cost-of-living increase in August. And of course, we know pump prices have continued to climb sharply through the early part of September.
MARTIN: OK. So let's go beyond the gas pump. What's happening to inflation overall?
HORSLEY: Yeah. It's a mixed bag. The overall cost of living in August was up 3.4% from a year ago, similar to the annual inflation rate the month before. That's higher than the Federal Reserve would like and could signal a need to raise interest rates. But if you strip out energy and food prices, the annual core inflation rate cooled a little bit last month. So Fed policymakers really have to try to figure out - which way is the trend line actually moving? Fed Governor Chris Waller said at a Reuters event last week he and his Fed colleagues would be studying today's inflation report very closely.
CHRIS WALLER: If there is continued progress towards our 2% goal, then I'm willing to support holding the policy rate at its current level. But if inflation comes in hot, I would consider a rate hike.
HORSLEY: In addition to energy prices, Fed policymakers have to weigh the effect of the new tariffs that President Trump has ordered on goods from Canada and how the artificial intelligence boom is affecting the price of things like computer equipment and building materials.
MARTIN: You know, Scott, you've been telling us that the new chairman of the Federal Reserve has deliberately avoided telegraphing where he thinks interest rates should go. But what are investors thinking?
HORSLEY: Well, right now investors think there's a good chance the Fed will raise interest rates next week. That probability increased after the inflation report came out this morning, but it's still not a slam dunk. You know, there are members of the Fed's rate-setting committee who want to raise rates. There are others who want to stand pat, and both could point to evidence to support their positions in this inflation report. Kathy Bostjancic, who's chief economist at the big insurance firm Nationwide, thinks it's likely the Fed will raise rates next week, but there's still some wiggle room.
KATHY BOSTJANCIC: I suppose it will be a good family fight, as Chair Warsh has talked about. It could very well be that even if war inflation comes in a little bit softer, it's not soft enough.
HORSLEY: And whatever the Fed does with short-term interest rates, the bond market is already signaling higher long-term borrowing costs. You know, this week, we've seen the yield of 10-year Treasuries close in on 5%. And that means higher interest rates for things like home mortgages and car loans.
MARTIN: That is NPR's Scott Horsley. Scott, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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