Fed might raise borrowing costs again to try to slow price increases

Trucks are parked at a Pilot gas station in New Jersey. Diesel prices have hit records and added to inflation.

The main inflation gauge used by the Federal Reserve to set U.S. interest rates rose sharply in August, underscoring why the central bank raised interest rates earlier this month for the first time in three years.

The Fed is trying to stamp out the latest flareup in inflation tied to the Iran war and high oil prices. The bank could raise rates again before the year is over if inflation readings continue to show rapidly rising prices.

Higher borrowing costs are a time-tested means to reduce the rate of inflation, though usually at the expense of economic growth.

In August, the so-called PCE index rose 0.3%, the government said Wednesday. That matched the 0.3% forecast of economists surveyed by The Wall Street Journal.

The yearly rate of inflation was unchanged at 3.4%.

Key details: A separate measure of inflation that strips out energy, known as the core rate, rose a smaller than expected 0.2% in August.

The year-over-year increase was also unchanged at 3%.

The Fed views the PCE index - the core rate in particular - as the most accurate barometer of U.S. inflation trends.

With the August report, the Bureau of Economic Analysis updated the formula it uses to measure inflation. The new method appeared to shave several tenths off the previous rate of inflation, but not enough to suggest a major change in the trend.

To learn more: Fed's favorite inflation tracker is getting an overhaul

Put another way, the rate of inflation is too high under both the new and old methodologies, economists say. The Fed is aiming to bring inflation down to 2% annually, but it hasn't hit that mark in more than five years.

Big picture: The Fed raised borrowing costs earlier this month and is expected to do so again in either October or December.

The central bank is unlikely to back off unless the Iran conflict ends and oil prices sink back to much lower prewar levels, thereby easing upward pressure on inflation.

Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX were set to open flat in Wednesday trading.

-Jeffry Bartash