WASHINGTON — The Federal Reserve raised interest rates Wednesday for the first time in three years as inflation continues to dog the economy, largely driven by soaring gas and fuel oil prices while the war in Iran drags on.

The central bank’s Federal Open Market Committee voted 12-0 to increase its benchmark interest rate by a quarter of a percentage point, reaching the new range from 3.75% to 4% and making the cost of borrowing more expensive for Americans.

The committee released an upbeat statement touting economic growth at “a solid pace.”

“While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little,” according to the statement released Wednesday afternoon.

“Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability,” the statement continued.

Federal Reserve Chair Kevin Warsh, four months into his tenure, described Wednesday’s unanimous decision to raise rates as “sober.”

“The plain fact is that inflation is too high, and has been for too long,” Warsh said during a press conference following the Fed’s meeting.

“This summer’s inflation readings do not tell me that underlying trends have meaningfully improved. … Too many categories are still posting increases above 3 percent on both a six and 12-month basis,” Warsh said.

Trump campaign for lower rates

President Donald Trump publicly pressured and name-called Warsh’s predecessor Jerome Powell for months for not lowering interest rates. 

The public attacks escalated into a federal probe of Powell and the Fed for costly renovations at the Fed’s headquarters in Washington. The administration eventually dropped the investigation.

Trump criticized the rate increase on his Truth Social platform Wednesday afternoon, saying the U.S. rates “should be 1%, or less, because we are the Best Credit in the World — BY FAR.”

“Our Country is BOOMING with new Investment! If we stopped Trading with every country that we have a Deficit with, which is most of them, we would make, at least, 1.5 Trillion Dollars a year. The word “Deficit” is nothing more than a fancy word for LOSS. We are “carrying” almost every country in the World, and that cannot go on any longer. LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!,” he wrote.

Warsh declined to answer questions from reporters about Trump’s previous calls for lower interest rates.

“Part of the independence of the Federal Reserve is we stay in our lane,” Warsh said.

The interest hike comes less than a week after the government’s latest consumer price index revealed the cost of food, energy, housing and other goods and services rose 0.4% from July to August. The cost of all items over the past year has risen 3.4%.

Rep. Jason Smith, the Republican chair of the tax-writing House Ways and Means Committee, criticized the decision, saying in a statement that “interest rates should be coming down, not going up.”

The Missouri Republican praised the Trump-led “big beautiful bill” tax law passed last summer for delivering “larger paychecks” to Americans, and he blamed former President Joe Biden for past higher inflation.

“After years of elevated borrowing costs, a rate increase is the opposite of the relief families and small businesses need. As President Trump works to restore stability in the Middle East and bring down energy prices, the Fed should recognize the progress,” Smith said in a written statement Wednesday afternoon. 

Soaring gas prices

Spiking energy prices caused by the war in Iran were the main driver behind higher costs. Gasoline alone rose 3.9% over the month of August. 

As of Wednesday, Americans were paying an average of nearly $4.37 a gallon at the pump, according to AAA. Diesel prices reached a record high of $6.31.

The price of a barrel of oil surged above $100 in recent days, including Wednesday afternoon, when it reached $105, as fighting flared in the Middle East. 

The United States and Iran continue launching rockets in the Strait of Hormuz, where one-fifth of the world’s petroleum traveled prior to the war. U.S. Central Command claimed Sept. 8 that it “destroyed” five Iranian crude oil carriers as part of its naval blockade aimed at damaging Iran’s economy.

The conflict spilled over in July into another key waterway for Saudi Arabian oil exports. Iran-backed Houthi rebels restarted an assault on commercial vessels in the Red Sea for the first time since 2024, and are fighting for control of the Bab al-Mandab strait. The group also directly struck targets in Saudi Arabia, a U.S. ally, beginning in July, and is threatening more strikes, according to Houthi spokesman Yahya Saree. The United Nations Security Council is warning of the likelihood of a humanitarian crisis. 

When asked by a reporter at Wednesday’s press conference how incremental rate hikes will help when geopolitical events do not show signs of improvement, Warsh said the Fed “cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store.”

“But what we can do and will do is ensure that any change in relative prices don’t broaden out, don’t have second and third order effects on the economy. That’s what we’re tasked to do, and that’s what we will do,” Warsh said.

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Click here to read highlights from the story

• Free, simple tools can help people measure the change in inflation and see whether their pay is keeping up. 
• Experts Wisconsin Watch spoke to said that if your wage hasn’t changed and inflation rises, your real earnings decrease. 
• Workers can use inflation calculators to seek a raise if their real wages have dropped.

Inflation hit a three-year high in May, leaving a growing number of Americans struggling to afford necessities. The rate has since slowed a bit, but most prices aren’t likely to come down. Analysts say “affordability” could be one of the deciding issues in this fall’s midterm elections. 

But while we all notice the spike at the gas pump and the cash register, many people may not realize they can use simple, free tools to quantify the change and figure out whether their pay is keeping up.  

Wisconsin Watch talked to two experts about how and why to use inflation calculators. Here’s what they told us.

What is inflation and how do we measure it?

Inflation is a measure of how much prices have risen in a given period. Some increase in prices is to be expected — the Federal Reserve aims for 2% inflation when it sets interest rates. When prices rise quickly, consumers and businesses may struggle to buy what they need. 

The U.S. Bureau of Labor Statistics releases monthly inflation reports showing how prices have changed over the month and the year. The most widely used of those measures is the consumer price index, which shows the change in “prices paid by urban consumers for a market basket of consumer goods and services.” In other words, it’s the weighted average of the change in prices of many of the things American consumers buy. According to the bureau, this rate reflects the spending patterns of more than 90% of the U.S. population. 

The bureau also publishes a variety of more specific inflation rates, including for different geographic areas and for different types of expenditures, including food and beverages, housing and medical care. It also calculates a second version of its national inflation figure, called the Consumer Price Index for Urban Wage Earners and Clerical Workers, which is based on the spending patterns of households where at least half of the income comes from wage or clerical work. 

Meanwhile, the Fed keeps an eye on a related but different inflation measure, the Personal Consumption Expenditures Price Index, as it’s setting interest rates.

How high is inflation today?

The latest consumer price index numbers, released on July 14, indicate prices rose 3.5% over the last 12 months. The numbers also show prices fell 0.4% in June, when adjusted for seasonal changes. The drop over the month came from falling gas prices, though the average cost of a gallon of gas in the U.S. remains about $1.10 higher than it was before the war in Iran began, according to a price tracker from NBC News.

Inflation today is far lower than in 2022, when it hit 8%, the highest in more than 30 years. But 3.5% is still well above the 2% target, said Menzie Chinn, professor of public affairs and economics at the University of Wisconsin-Madison. 

“Inflation is not as big of a concern in terms of its absolute value as it was maybe four years ago, but it’s higher than we would want, and going forward we certainly don’t want inflation to be running at this pace,” Chinn said. 

Meanwhile, wage growth has slowed, falling behind price growth. Nationally, wages and salaries rose 3.4% between March 2025 and March 2026, according to the latest data from the Bureau of Labor Statistics.  

“Concern about prices rising is not just prices rising, but it’s against the backdrop of how fast wages are rising. How many people are keeping up, and what components of the population are keeping up?” Chinn said.

The inflation rate may eventually come down, meaning the rate at which prices are rising slows. And some individual prices, including gas prices, could come down too. But prices overall seldom fall. 

“The price level is probably never coming down, unless we have a severe downturn of some sort,” Chinn said.

What are inflation calculators and how do I use one?

Inflation calculators let you enter a dollar value and see how the buying power of that dollar value has changed over time. One easy way to understand this is to think about what a dollar could have bought 50 years ago. Today, that dollar is essentially worth less because you’d need more than a dollar to buy the same goods. An inflation calculator can show you exactly how big the change is: You’d need $5.88 today to buy what a dollar would buy in 1976,  according to the Bureau of Labor Statistics’ CPI Inflation Calculator.

For a more practical example, enter your wage or salary at the time of your last raise, indicate the month and year of that raise, then select the latest month for which data is available. That tells you how much that wage or salary is worth in today’s dollars. 

You can also do the calculation backward to see the contrast in a different way. For example, if you earn $50,000 and you last received a raise two years ago, your pay today only goes as far as $47,038.95 at the time of your last raise. In other words, your “real salary” has fallen by 5.9%.

“If your wage is stuck and inflation is going up, your real earnings are going down,” said University of Wisconsin-Milwaukee economics professor John Heywood, who directs the school’s graduate program in human resources and labor relations. 

You can also use these tools to check whether a given price has been rising faster or slower than inflation.  Say your rent was $900 a month in June 2024, and it rose exactly in line with the index for all prices. It would now be $956.65. If it’s risen more than that, it’s outpaced inflation.

Here are links to a few useful inflation calculators:

• U.S. Bureau of Labor Statistics’ CPI Inflation Calculator: bls.gov/data/inflation_calculator.htm
• Federal Reserve Bank of Minneapolis’ inflation calculator: minneapolisfed.org/about-us/monetary-policy/inflation-calculator 

How can I use the information I get from an inflation calculator?

Inflation calculations can be a helpful tool for workers seeking a raise. Heywood suggests workers seeking raises gather information on both how their real earnings have declined over time and how their earnings compare with those of people in comparable positions in the industry and geographic area, and present that data to their human resources department.

“My impression is that at large corporations and at corporations that sort of follow best practices, they don’t want their workers to be paid less than their rivals or have their earnings go down, because they’re always in a competition for keeping and retaining talent,” Heywood said.

“If you can show, for example, that your wage hasn’t kept up with inflation or with your comparables, then a sensible HR department says, ‘Here’s somebody we might lose,’ and might very well be willing to increase somebody’s hourly or salary rate,” he said. 

If you’re represented by a labor union, your union representatives are likely doing these kinds of calculations regularly.

“It’s part of making sure that their members don’t have their earnings eroded by inflation,” Heywood said. 

To hold workers’ buying power steady, Heywood said, many union contracts include automatic cost of living adjustments. Six months into the contract period, for example, workers’ wages will rise by the same percentage that prices rose during those six months. 

Clauses like those were far more common before the soaring inflation of the 1970s and 1980s, Chinn said, noting that raising wages automatically in response to inflation can sometimes make inflation worse. As economists battled to get prices under control in the 1980s, they became more skeptical of these automatic wage increases.

“It’s good for the workers, it protects their buying power, but that means the cost of making stuff rises … which then feeds into next year’s demands,” Chinn said. Thus even a temporary shock to the economy can last much longer. 

But not raising pay comes at a cost too. “If they don’t get that automatic adjustment, it’s more likely they won’t get to maintain the real wage,” Chinn said.

Automatic cost of living adjustments are still common in some industries. “The auto industry uses it, (along with) aerospace, defense, postal workers, letter carriers, and a lot of local public unions,” Heywood said. “It hasn’t gone away.”

What’s the inflation forecast?

Many economists are predicting 2.5% to 3% inflation over the next year, Chinn said. He thinks those predictions are probably about right. 

“That’s assuming that we’re not having a big resumption of the war with Iran that completely blocks off indefinitely the Strait of Hormuz,” Chinn said. “That assumes no big collapse in the stock market and no big jumps in a trade war going forward.”

Natalie Yahr reports on pathways to success statewide for Wisconsin Watch, working in partnership with Open Campus. Email her at nyahr@wisconsinwatch.org.

With prices up, here’s how and why to use an inflation calculator is a post from Wisconsin Watch, a non-profit investigative news site covering Wisconsin since 2009. Please consider making a contribution to support our journalism.