Analysis: Assessing inflation’s impact

Inflation affects the economy by reducing purchasing power, raising business costs and influencing interest rates. Households lose purchasing power when income and investment gains fail to keep pace with rising prices. Businesses must decide whether to absorb higher labor, materials, transportation and financing costs or pass them on to customers.

Investors should look beyond whether inflation is rising or falling and identify what drives the change. The source and duration of price pressure help determine how inflation could affect consumer spending, economic growth and interest rates. Current readings point to a mixed outlook, with easing pressure in some areas and renewed risks from energy and trade policy.

Current inflation remains elevated

The Consumer Price Index, or CPI, rose 0.4% in August and 3.4% from a year earlier, matching July’s annual rate. ¹ Gasoline prices climbed 3.9% and accounted for more than one-third of the monthly increase, while the broad energy category climbed 2.1%, shelter rose 0.3% and food increased 0.1%. ¹ Energy prices stood 16.3% above year-earlier levels, leaving household budgets and business costs exposed to further energy cost swings. ¹

Core CPI excludes food and energy because those prices often move sharply from month to month. Core prices rose 0.3% in August and 2.4% from a year earlier, down from 2.5% in July. ¹ The slower annual pace signals some moderation in underlying inflation, although one monthly reading does not establish a broader trend.

Shelter inflation and home prices offer mixed signals

Shelter prices rose 0.3% in August after increasing 0.1% in July, so housing continued to add to monthly inflation. ¹ Official shelter measures often trail current rental conditions because they reflect the full stock of leases, not only newly signed contracts. Slower growth in advertised rents therefore takes time to appear in CPI.

Home prices provide a second housing signal. The S&P Cotality Case-Shiller U.S. National Home Price Index rose 1.5% in June from a year earlier, up from 1.2% in May but well below the 3.4% rise in consumer prices. ² Softer inflation-adjusted home-price growth and the delayed effect of rent changes suggest that housing could add less pressure over time, although results vary by region.

Inflation risks from energy markets and tariffs

Geopolitical conflict can lift inflation by disrupting energy supply and raising transportation, shipping and insurance costs. Consumers encounter the effects through gasoline and utility bills, while companies pay more to produce and deliver goods. A prolonged energy shock can also slow growth as households and businesses spend more on fuel without receiving additional goods or services.

“Markets are sensitive to sustained, accelerating inflation, but underlying inflation excluding energy has remained elevated but steady in recent months,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “Recent labor market data have been encouraging, although meaningful labor-market weakness would raise the risk of a sharper economic slowdown.” His assessment argues for evaluating inflation, employment and growth together instead of treating one data release as a complete market signal.

How tariffs influence inflation and consumer prices

Tariffs raise the cost of imported goods and materials used in domestic production. These costs do not reach consumers at a fixed speed because companies can absorb them in profit margins, raise prices, change suppliers or redesign products. Investors should focus on tariffs that take effect and on how businesses respond rather than assume every announcement will produce the same result.

The effective tariff rate compares customs revenue with the value of imported goods and offers a broad measure of tariff costs entering the economy. Companies can pass these costs to consumers, absorb them or redirect supply chains, so the effects can appear through prices, profits and economic activity at different times. This range of responses makes the inflation impact less predictable than a headline tariff rate suggests.

Market-based inflation expectations provide another signal

Treasury Inflation-Protected Securities, or TIPS, adjust their principal value with CPI. Comparing TIPS yields with conventional Treasury yields produces a market-based estimate of expected inflation, often called the breakeven inflation rate. It can respond to new information faster than government reports, although changes in market liquidity and the compensation investors demand from uncertainty can also influence it.

“Capital markets can provide a valuable source of information about the outlook for inflation because they often incorporate new information faster than lagging economic data or official forecasts,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. TIPS pricing can help investors assess whether markets expect an energy or tariff shock to persist. Investors should compare that signal with consumer prices, wages, spending and Federal Reserve policy rather than use it in isolation.

How inflation and Federal Reserve policy affect interest rates

The Federal Reserve raised the federal funds target range to 3.75% to 4.00% at its September meeting, its first increase in three years. ³ That policy rate influences short-term borrowing costs, while longer-term market rates affect mortgages, business financing and many investment valuations. With inflation above target, policymakers may keep rates restrictive or raise them again if price pressures broaden.

The Fed targets 2% inflation over the longer run using the annual change in the headline Personal Consumption Expenditures Index, or PCE, which measures prices across a broad range of consumer spending. July headline PCE rose 0.2% for the month and 3.7% from a year earlier. Core PCE, which excludes food and energy to clarify the underlying inflation trend, increased 0.2% for the month and 3.3% from a year earlier. ⁴

Disposable personal income rose 0.5%, but inflation-adjusted consumer spending was essentially unchanged. Stronger income growth therefore did not translate into a meaningful increase in the amount of goods and services households purchased. That combination helps explain why policymakers assess inflation alongside income, spending and labor-market conditions.

Investors should connect inflation’s major drivers rather than rely on one monthly figure. Slower shelter inflation could extend the broader moderation, while higher energy prices, firm demand or wider tariff effects could keep inflation elevated and encourage the Fed to raise rates further. A diversified portfolio cannot prevent losses, but it can reduce dependence on a single inflation or interest-rate outcome as policy, energy markets and business behavior reshape the outlook.

Why inflation matters to investors

Inflation matters to investors because it can reduce the real value of portfolio growth over time. Even when an account balance rises, those gains may buy less if the cost of goods and services continues to increase. For long-term investors, the goal is not only to grow assets, but also to preserve purchasing power.

Inflation can also influence interest rates, which can affect both bonds and stocks. When rates move higher, older bonds with lower yields often lose value in the market. Higher rates can also weigh on stock prices by reducing the present value of future earnings. A diversified investment strategy can help investors manage these risks while staying focused on long-term growth.

How inflation erodes purchasing power over time

Inflation reduces purchasing power by making everyday goods and services more expensive over time. As prices rise, each dollar buys less than it did before. This gradual change can affect household budgets, retirement planning, and long-term savings goals.

The long-term impact can be significant. Based on the Consumer Price Index from the U.S. Bureau of Labor Statistics, something that cost $1 at the start of 2000 cost about $1.93 by the start of 2026. That means prices nearly doubled over that period, showing why inflation remains an important part of financial planning and investment strategy.

Inflation and the difference between nominal and real outcomes

Inflation explains the difference between nominal returns and real returns. A nominal return is the number shown on an investment statement, paycheck, or savings account. A real return adjusts for inflation and shows how much buying power increased after rising prices are considered.

For example, a bond may pay a 5% nominal yield over a year. If inflation averages 2% during that same period, the real return is closer to 3%. Investors track this difference because strong long-term results depend on growing wealth faster than the cost of living.

Why inflation is a long-term risk, not a short-term event

Many people notice inflation when prices jump in a given month or year. Investors usually focus on inflation as a long-term risk because prices tend to rise over time, even when inflation slows for a period. That steady increase can gradually reduce the future value of savings and investment gains.

For long-term investors, inflation is not just a short-term headline. It is an ongoing part of portfolio planning, retirement income planning, and wealth preservation. A sound investment approach aims to outpace inflation over time so investors can maintain spending power and stay on track toward long-term financial goals.

What investors should do now

The best response to an uncertain inflation path is to stay focused on what you can control. Inflation remains a key driver of interest rates and market volatility, and tariffs and energy shocks can create short-term setbacks even when the longer-term trend is improving. A disciplined plan and a broadly diversified portfolio can help investors avoid making lasting decisions based on a single report or a short burst of volatility. That approach can keep long-term goals at the center of the plan.

If inflation continues to cool, especially if shelter inflation keeps easing with a lag, the case for lower rates can strengthen. If energy prices rise sharply or tariffs become more inflationary than expected, that timeline can shift. Talk with your financial professional about how your portfolio aligns with your goals, time horizon, and comfort with short‑term swings, and discuss whether any adjustments make sense for your situation.

FAQs

What is the current inflation rate?

In August 2026, CPI rose 0.4% for the month and 3.4% from a year earlier. The annual rate matched July, while core CPI slowed to 2.4% from 2.5%. ¹ Household experiences can differ from the national average because spending patterns vary and food, energy and housing prices do not move together.

Why does “core” inflation matter?

Core inflation excludes food and energy because those prices can change sharply from month to month. Core CPI rose 0.3% in August and 2.4% over the prior year, helping investors and policymakers assess whether broader price pressure is easing. ¹ The Fed still targets headline PCE inflation but uses core readings to evaluate the underlying trend.

Why does the Fed focus on PCE inflation instead of CPI?

The Fed defines its 2% longer-run inflation goal using the annual change in the headline PCE price index rather than CPI. PCE covers a broader range of consumer spending and adjusts as households change what they buy, while CPI tracks prices for a basket of goods and services. In July, headline PCE rose 0.2% for the month and 3.7% from a year earlier, while core PCE rose 0.2% and 3.3%, respectively; the Fed reviews these readings alongside CPI to distinguish persistent price pressure from short-term food and energy swings. ⁴