Even a cooler inflation report may not be enough to keep the Fed from raising rates next week

By Elisabeth Buchwald, CNN

(CNN) — Americans have already been feeling the pain at the gas pump as the war with Iran has pushed up prices to record highs for this time of year. But the bigger concern is what happens next.

Persistently higher energy prices – especially for diesel – could continue to push up the cost of freight and become inescapable for businesses, making groceries and other consumer goods more expensive.

That’s why the Federal Reserve is watching Friday’s August Consumer Price Index report even more closely than usual. The latest report is expected to show that inflation cooled slightly on an annual basis — but economists also expect prices to have picked up on a monthly basis. Any hint that price pressures remain stubborn or have broadened across the economy could be enough to convince Fed officials to hike interest rates at next week’s monetary policy meeting.

Economists polled by FactSet expect inflation for the 12 months ended in August to come in at 3.3%, a slight deceleration from July’s 3.4% rate. On a monthly basis, though, price increases are expected to accelerate to 0.4%, compared to July’s 0.1% pace.

When stripping out food and energy prices, a measure of underlying inflation known as “core” inflation is expected to remain relatively tame. Economists expect core prices to rise by 0.2% in August, unchanged from July, bringing the annual rate down to 2.4% from the prior month.

But the headline and core numbers may not tell the full story.

Wholesale inflation as measured by the Producer Price Index accelerated sharply in August, according to the latest report, released Thursday by the Bureau of Labor Statistics. Prices for goods alone rose 1.1% last month, a significant shift from July’s 0.4% decline. More than three-quarters of that increase was driven by a 4.2% monthly rise in energy prices, the BLS said.

PPI is seen as an important indicator for how consumer prices could move in coming months, since businesses are typically the first to see price increases. But higher costs aren’t necessarily passed along to shoppers, since many businesses absorb some of the increase themselves.

That could become harder to do if businesses are squeezed by higher tariffs at the same time that elevated energy costs are pushing up the cost of transportation.

Corporate America is ‘covered’ — for now

If you ship a package right now with a carrier like UPS, you’ll pay a fuel surcharge that’s adjusted weekly, based on average fuel prices tracked by the government.

Big corporations, however, often negotiate longer-term contracts with carriers that lock in their transportation rates, shielding them from some of the immediate impact when fuel and other transportation costs rise.

For instance, General Mills CEO Jeffrey Harmening said Wednesday that the company is seeing overarching transportation costs, which he referred to as “logistics costs,” up 40% from this time last year.

“But that’s a spot rate, and we don’t pay the spot rate on all of our freight. We probably pay the spot rate on probably about 7% of our freight,” he said at a Barclays investor conference. Spot rates refer to current market prices. “So when you see those costs going up and you see that spot rate going up, you should not assume that General Mills is paying all that increase at this time.”

He said the company has its key input costs, including crops like wheat, are “covered” for the next six to nine months. In other words, General Mills can wait longer to pass along higher prices to consumers since it is currently shielded from much of the increased cost themselves.

Temporary relief is also stemming from tariff refunds.

Tractor Supply CEO Hal Lawton said his company is putting two-thirds of its anticipated tariff refund of $100 million to $150 million toward “covering freight and incremental fuel costs,” he said at the same Barclays conference. The other third has gone toward keeping prices lower than they otherwise would’ve been.

But that relief may not last. Several CEOs have warned investors that the benefit of tariff refunds will fade, potentially leaving companies with fewer options in terms of absorbing rising costs.

This story will be updated when the CPI report is released at 8:30 a.m. ET.

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