Hot Core CPI Reading Pushes Fed Hike Odds to 90%

August core CPI rose 0.3% monthly, above forecasts, driving market odds of a Federal Reserve rate hike next week to roughly 90% from 70%.

August consumer prices rose 0.4% month over month, leaving headline inflation unchanged at 3.4% annually, but the surprise came from core CPI, which excludes food and energy: it jumped 0.3% on the month, above the 0.2% economists expected. Core inflation cooled slightly in year-over-year terms to 2.4% from 2.5% in July, yet the monthly acceleration is what Fed officials watch for signs that energy shocks are bleeding into broader prices. Gasoline accounted for more than a third of the monthly increase, and diesel hit a record $6.06 a gallon on Friday, according to AAA data cited by CBS News. The report is the final inflation reading before the Fed's Sept. 15-16 meeting.

Counterintuitively, Investor's Business Daily reports that futures for the Dow Jones Industrial Average and other major indexes rallied Friday as Wall Street digested the slightly hotter-than-expected CPI report. Traders instead repriced the Fed: market odds of a rate hike next week surged from under 70% to nearly 90% after the release, according to CME FedWatch figures reported by NBC News, and odds of a follow-on October hike climbed to almost 60%. 'America still has an inflation problem,' Navy Federal Credit Union chief economist Heather Long wrote after the data, a sentiment NBC News cites alongside the market repricing.

The details of the report show inflation spreading beyond energy. NBC News reports airline fares rose 2.7% in August while the communications index rose 2.3%, with used cars, trucks and education also higher. A separate Bloomberg analysis relayed by The Spokesman-Review notes the Iran war, tariffs and the AI buildout are the key inflation drivers, and higher rates are poorly equipped to fight supply shocks.

CBS News reports the hotter print raises the likelihood the Federal Reserve will issue its first interest rate hike in more than three years at Wednesday's Sept. 16 decision. Fed Chairman Kevin Warsh signaled at Jackson Hole that reining in price pressures remains the central bank's primary focus, saying it will 'have work to do' if inflation does not fade. Borrowing costs are already rising without the Fed: The Spokesman-Review, citing Bloomberg reporting, notes 10-year Treasury yields hit their highest level since 2023 and mortgage rates reached a more than one-year high, straining households as real average hourly earnings fell 0.1% from July to August.

The Fed meets Sept. 15-16, and analysts see a hike as all but certain. Capital Economics chief North America economist Stephen Brown said the core CPI upside surprise 'means the Fed looks set to hike next week,' per NBC News. The complication, as The Spokesman-Review details, is that the biggest drivers — energy, tariffs and AI-related construction — are largely rate-insensitive, so the central bank may have to lean on the consumer, putting downward pressure on discretionary spending. Natixis chief U.S. economist Christopher Hodge said the 'onus is on the inflation data to impress' and anything short of clear progress 'will prompt a hike next week.'

While inflation dominated the tape, earnings added fuel to Friday's session. Investor's Business Daily reports Oracle stock jumped after its earnings beat estimates and cloud infrastructure growth accelerated, and Adobe shares fell despite beating fiscal third-quarter estimates, with investors waiting on the new CEO's strategy. Nvidia, meanwhile, looked to snap a three-day losing streak as major indexes rallied.