Getting the inflation genie back in the bottle is proving a lot harder than initially thought.

On Sep 13, the Labor Department reported a surprise uptick in U.S. consumer prices. The consumer price index (CPI) rose 0.6% in August—the biggest monthly jump since June 2022.

Meanwhile, the yearly inflation rate came in at 3.7%—up from 3.2% in July and June’s 27-month low of 3%.

In August, Americans paid more for airfare, car insurance, and auto repair. Other "bank breakers" were transportation services, groceries, and eating out at restaurants.

But nothing compared to the price surge at the pump. The price of motor fuel shot up 10.7%, while all other types of fuel rose 10.6%.

After raising interest rates 11 times since March 2022, the Fed’s restrictive policies were supposed to tame inflation. For the most part, they are. But some things are beyond the Fed’s immediate control.

The real reason inflation is rising

How much are oil prices contributing to inflation? More than half, according to The Wall Street Journal.

When you strip away energy and food costs, CPI rose just 0.3% in August. This category of “core CPI” actually fell to 4.3% annually from 4.7% in July.

For the most part, inflation is improving, but only when energy is removed from the calculation.

This is both a good thing and a bad thing.

On the one hand, it means the Fed is getting a grip on inflation. On the other hand, oil prices are largely determined by external factors (ahem, OPEC) outside the Fed’s control.

And lately, OPEC has shown scant sympathy for the Fed's troubles.

Since Saudi Arabia and its allies limited production by 1.3 million barrels per day, global oil prices have jumped 25%. Earlier this month, the cartel extended the cuts until the end of 2023.

When major oil producers cut production, oil prices typically edge higher.

That means potentially higher input costs for global supply chains that deliver essential supplies—and higher prices at the pump.

A silver lining

The August CPI print was a mixed bag for economists, but it’s far too premature to sound the alarm just yet.

Since peaking at 9.1% in June 2022, annual CPI has come down almost every month. That’s progress, no matter how you slice it.

Stephen Juneau, senior U.S. economist at Bank of America, compared progress on inflation to scoring a touchdown in football. “You still have to cross into the end zone, and that can sometimes be the hardest thing to do,” he said.

Investors are also confident that the Fed sees enough progress on inflation to keep interest rates on hold for now. According to CME futures data, traders have placed 96% odds that the Fed won’t raise rates during its Sep 20 meeting.

But the Fed’s September meeting isn't just about the rate setting.

With accompanying economic projections and guidance, it will likely set the tone for the rest of the year—driving everything from mortgage rates to your 401(k) returns.