Fed Surveys Point to a Fourth Straight Monthly Inflation Decline

Editor's Note: I will be traveling Tuesday through Thursday so I will do my best to get commentary out.

Fed Surveys Point to a Fourth Straight Monthly Inflation Decline

• The average price for a gallon of gasoline rose about 0.7% in August.

• Regional Fed prices received data showed a decline last month.

• The Cleveland Fed’s inflation forecast implies real rates held steady.

The inflation trend should keep moving in the right direction...

This week brings a key update for anyone tracking the Federal Reserve's rate path: the Bureau of Labor Statistics ("BLS") releases its August Consumer Price Index ("CPI"). Based on my recent gas station visits, prices ticked higher last month, but not by much.

According to the Energy Information Administration ("EIA"), the average gallon of gasoline cost $4.19 last month. By my math, that puts gas prices up 0.7% month-over-month in August, well below July's 2.5% jump…  

As the chart above shows, the first half of the year typically produces the bulk of annual price growth. Then, as the year progresses, prices start to ease.

• This month's gain still beat the typical 0.2% rise for August.

• The Cleveland Fed's staff projects headline CPI held steady at 3.4%.

• That could ease Wall Street's worries about a September rate hike.

Chairman Kevin Warsh has signaled the central bank is prepared to raise rates if inflation keeps climbing. Other policymakers sound nervous too, but they've said they're willing to hold off as long as price growth doesn't reaccelerate. That's the crux of it: the hike talk only matters if inflation turns back up. Based on the data I track, it hasn't. Price growth is declining again, which gives the Fed room to stay on hold.

But don’t take my word for it, let’s look at what the data’s telling us…

To gauge what inflation might look like each month, I built an index using manufacturing and services survey data from the Dallas, Kansas City, New York, and Philadelphia Fed districts. These surveys ask businesses whether activity is rising, falling, or holding steady, then convert the responses into an index. Together, these four districts represent roughly 32% of national economic output, and I focus on the "prices received" components because they act as a proxy for CPI.

Each district is weighted by its contribution to national growth, which gives a cleaner read on how they move the overall picture.

• In August, the combined manufacturing prices-received index came in at 23.9.

• That's down from 26 in July and 29.7 in June.

• That's three straight monthly declines - the first streak like it since July through September 2025, when price growth hovered around 2.9%.

Manufacturing accounts for about 10% of domestic output. Services matter more. That sector covers healthcare, education, finance, and hospitality, the parts of the economy where most Americans work and spend.

• My gauge shows the services index fell to 16.7 in August.

• That compares to 20.3 in July and April’s recent peak of 20.5.

• That’s the weakest pace of growth since last December.

Next, I blended the two measures, weighting each by its economic importance and its relevance to CPI. Since services dominate the U.S. economy, they carry more weight in the combined reading.

• The composite came in at 19.2 for August.

• That compares to 22.3 in July, 23 in June, and the recent peak of 24.2 in April.

• That’s four straight monthly declines.

Here's why that matters: companies are still raising prices on consumers, but the pace is slowing. They're likely passing along the elevated fuel costs from the spring and summer. The details back that up too. Prices received fell in every region except Kansas City. That gives policymakers room to stay on hold. But their patience is wearing thin. If prices start surging again, a rate hike becomes all but certain.

The last piece is measuring how much cushion the Fed actually has. I do that by looking at the real rate of interest, or the effective federal funds rate minus inflation. A positive number means policy is restraining price growth; a negative number means it's fueling it. Based on the most recent CPI data, rate hikes aren't necessary yet…

In July, the effective federal funds rate sat at roughly 3.6% while inflation ran at 3.4%, putting the real rate at 0.2%. That’s about 20 basis points above neutral, the level where rates neither help nor hurt growth. Since the Fed has averaged a real rate of -0.6% since 2000, that gap implies policymakers have about 80 basis points of room before policy would need to tighten.

Apply the Cleveland Fed's 3.4% CPI estimate for August, and the math barely moves: the real rate holds at 0.2%, so that 80-basis-point cushion stays intact.

Bottom line: the Fed has room to hold, but not a lot of it. Eighty basis points is enough to justify patience, not enough to make policymakers comfortable. That's why the committee sounds nervous even while sitting still. If the situation in the Middle East settles down, or oil supply rebounds through other channels, inflation could keep cooling and reopen the door to lower borrowing costs next year. That would help underpin a steady, long-term rally in the S&P 500.

Five Stories Moving the Market:

U.S. peace envoys Jared Kushner and Steve Witkoff heralded new momentum in peace talks after meeting Ukrainian President Volodymyr Zelenskiy in Kyiv as the ​Trump administration renewed its push to end Russia's four-and-a-half-year war in Ukraine – Reuters. (Why you should care - a Ukraine/Russia peace deal could boost the global availability of commodities, weighing on metals and energy product prices, potentially easing the inflation growth outlook)

U.S. forces struck three Iranian oil tankers after Navy warships were targeted with ballistic missiles, according to the American military. The U.S. warned that it would "if necessary, destroy Iran's limited and exposed oil fleet" – AP News. (Why you should care – the strikes are a sign the government in Tehran is increasingly desperate to end the U.S. blockade of Iranian oil exports) 

Iran’s oil export revenue is drying up as a U.S. naval blockade strangles shipments from the Persian Gulf and offshore stockpiles feeding China dwindle, putting more pressure on Tehran’s battered economy – WSJ. (Why you should care – the lack of revenue is increasing economic pressure on the government in Tehran to strike a deal with the U.S.)

Energy Secretary Chris Wright said that oil flows through the Strait of Hormuz, combined with bypass pipelines, have recovered to roughly two-thirds of pre-conflict levels, with the market largely absorbing the difference; Wright said 9 million barrels of oil are transiting the Strait of Hormuz while another 5 million are flowing via pipelines – ABC News. (Why you should care – oil prices may currently be driven more by fear-riddled headlines than fundamentals)

China's finance ministry will lead a combined $54 billion capital injections into state-owned insurers and banks, according to the companies, in a coordinated push by Beijing to shore up capital across its financial system – Reuters. (Why you should care – the move is a sign the country’s economic growth continues to struggle as countries push back on the dumping of Chinese goods on foreign markets)

Economic Calendar:

Earnings: ABM, CASY, GME

Germany - Trade Balance for July (2 a.m.)

France – Exports, Imports for July (2:45 a.m.)

U.S. - NFIB Small Business Optimism Index for August (6 a.m.)

BoE's Bailey (Governor) Speaks (9:15 a.m.)

BoE's Ramsden (MPC Member) Speaks (9:15 a.m.)

U.S. - Conference Board Employment Trends Index for August (10 a.m.)

U.S. - NY Fed Consumer Inflation Expectations for August (11 a.m.)

Treasury Auctions $92 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $79 Billion in 26-Week Bills (11:30 a.m.)

China – Exports, Imports for August (12:15 p.m.)

Treasury Auctions $75 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $58 Billion in 3-Year Notes (1 p.m.)

U.S. - Consumer Credit for July (3 p.m.)

South Korea - Unemployment Rate for August (7 p.m.)

China - CPI, PPI for August (9:30 p.m.)