Welcome to the September 2026 edition of NC Economy Watch: an update on what’s happening in the North Carolina economy and what it means for you, brought to you by the Labor & Economic Analysis Division (LEAD) of the NC Department of Commerce.
In this edition of NC Economy Watch, we unpack what’s going on with inflation in 2026. Following a few years of steady progress, inflation spiked again this year, driven primarily by an energy price shock from the conflict in the Middle East. Tariffs and the artificial intelligence (A.I.) buildout have added further pressure, complicating the path to normal price growth.
Inflation’s Bumpy Road
For those dealing with sticker shock, this year hasn’t offered much relief. After peaking in 2022 at its highest level in over four decades, inflation had been steadily easing toward a more normal pace of price growth. But that progress stalled this year, as conflict in the Middle East triggered a global energy shock. Add in cost pressures stemming from tariffs and the A.I. buildout, and it’s clear the road back to normal has hit some unexpected bumps.
Today’s inflation picture looks quite different from the surge of 2021-2023, when over-the-year consumer price growth reached 9%. Back then, we were still recovering from pandemic-induced supply chain disruptions and dealing with the economic fallout from Russia’s invasion of Ukraine. A hot housing market and labor shortages added further fuel to economy-wide price increases.
Although the economic backdrop is different, we once again find ourselves confronting a supply shock. Consumer prices rose 3.4% from August 2025 to August 2026, on par with inflation readings from early 2023 [Figure 1]. Most of this uptick traces back to the conflict in the Middle East, which has disrupted energy flows through the Strait of Hormuz, a critical global waterway for the trade in crude oil, liquefied natural gas, and other commodities (e.g., fertilizer and helium). The resulting shock to energy flows has pushed up the cost of refined petroleum products, including the prices we pay at the pump and jet fuel.
Due to the volatile nature of energy prices (and food prices), economists typically track "core" inflation—price growth excluding food and energy components. By that measure, consumer prices grew a more tepid 2.4% over the year in August.
Figure 1
Rising energy prices don’t tell the whole story, however. Tariffs have also played a role over the last year. Determining their exact impact on prices can be challenging, since it depends on the decisions made by foreign exporters, U.S. importers, retailers, consumers, and so on. But the basic intuition holds that higher tariffs on imported goods can push up consumer prices as businesses decide to pass on some of the added costs to customers. Research from the New York Fed suggests nearly 90% of the economic incidence of recent tariffs fell on U.S. firms and consumers, rather than on foreign exporters.
Indeed, we can see this reflected in consumer prices for several goods categories, such as apparel, toys, and sporting goods [Figure 2]. Apparel prices, for example, have risen about 4% since last August. Prices for sporting goods and toys have also seen increases, despite seeing price deflation in recent years.
Figure 2
How tariff-induced inflation proceeds from here is an open question, complicated by several countervailing forces. There’s some evidence that tariff passthrough to consumer prices has stabilized in recent months, following the U.S. Supreme Court’s decision to strike down many tariffs imposed last year. Some companies that received tariff refunds have said they will pass those refunds on to customers in the form of lower prices. But at the same time, new tariffs are on the table, and the evolving U.S.-Canada trade dispute remains a wildcard.
Beyond the Middle East conflict and tariffs, another emerging force deserves attention for its inflationary implications: the A.I. buildout. Rapid advancements in generative A.I. technologies in recent years have fueled a surge in data center construction across the country. By mid-2026, investment in U.S. data centers surpassed $75 billion annualized [Figure 3]. For context, that is more than double the amount of construction spending on restaurants, grocery stores, and shopping centers combined.1
These data centers require sophisticated computing equipment, such as servers, data storage drives, and network infrastructure, along with large cooling systems and generators to keep everything running. That demand is straining the availability of key components like memory and storage chips, which are also found in everyday consumer electronic products ranging from phones to video game consoles. As a result, memory chip shortages are forcing companies to raise prices on popular products to offset the higher cost of components. We’re beginning to see these A.I.-related price increases show up in various measures that track consumer and producer prices across the U.S. economy.
Figure 3
For North Carolina households and businesses, inflation carries real consequences. Higher prices for everyday goods and services can squeeze household budgets at a time when wage growth has cooled. For businesses, rising input costs can complicate decisions around hiring and investment. Complicating matters further, the Federal Reserve may decide to raise interest rates if inflation does not ease in the months ahead, which would make it more expensive for households and businesses to borrow money. Whether price pressures moderate over the coming year remains to be seen, but one thing is clear: inflation has proven more stubborn than many had expected.
For inquiries and requests, please contact:
Meihui Bodane, Assistant Secretary for Policy, Research and Strategy
NC Department of Commerce, Labor & Economic Analysis Division (LEAD)
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In July 2026, construction spending on food/beverage (incl. restaurants and grocery stores) and multi-retail categories (incl. shopping centers) was $30.4 billion annualized. Source: https://www.census.gov/construction/c30/historical_data.html