A hotter-than-expected inflation reading has sharply raised the chance that the Federal Reserve will raise interest rates next week, which would be its first rate hike since 2023.
The Bureau of Labor Statistics said the consumer price index rose 3.4% in the 12 months to August, the same yearly pace as July and above the Fed's 2% target. Prices climbed 0.4% from the previous month, faster than July's 0.1% gain. Core inflation, which strips out food and energy, rose 2.4% on the year, down slightly from 2.5% in July.
Markets reprice the September meeting
After the report, traders using CME Group's FedWatch tool put the probability of a quarter-point increase at the September 16 meeting at close to 90%, up from roughly 70% the day before. EY-Parthenon changed its forecast from a hold to a 25 basis point hike, which would move the federal funds rate to a target range of 3.75% to 4%.
The Fed held rates at 3.5% to 3.75% in July on a 9-3 vote, with three officials arguing that borrowing costs needed to rise. Chair Kevin Warsh used his Jackson Hole speech on August 28 to say inflation was still too high and that the committee had more work to do. Not every economist agrees. A Reuters poll published before the CPI release found a majority still expected the Fed to hold steady through the rest of 2026.
Energy shock complicates the picture
Much of the recent price pressure comes from energy. Fighting in the Middle East has pushed crude oil above $100 a barrel, and producer prices rose 5.4% on the year in August. Higher fuel costs have fed into freight, airfares and electricity, even as gasoline prices eased month to month.
Stocks slid this week as oil climbed and government bond yields rose, a sign investors expect tighter money. The September 16 decision will come with updated projections and a fresh dot plot, giving markets their clearest view yet of where officials think rates are heading into 2027.