The latest Consumer Price Index released Friday showed that inflation remains stubbornly elevated, amplifying the likelihood that the Federal Reserve raises its benchmark rate when it meets Wednesday.
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Overall inflation rose 0.4% from July through August to 3.4% at an annual rate, largely matching economists' expectations. Core CPI, which removes food and energy costs, came in slightly above analyst targets at a 0.3% increase from the prior month.
Market watchers had been awaiting Friday’s report for guidance on what the Fed might do when it meets to decide the direction of rates. The high print relative to the central bank’s 2% inflation target bolstered expectations that a rate hike is more likely than not.
“My conclusion here is that today’s CPI all but locks in a Fed rate hike next week. The only question is 25 or 50” basis points, Guy LeBas, a fixed-income strategist at Janney, wrote on X.
Futures traders have increasingly bet on a 25-basis-point hike on Wednesday, with CME Group’s FedWatch tool showing more than an 85% chance of a rate increase on Friday. Betting markets like Kalshi shifted more dramatically to favor a rate hike on the CPI numbers but are still more bullish than futures traders that the Fed will hold rates flat.
A rate hike would increase borrowing costs across the economy, including for commercial real estate acquisitions, refinancings and operations.
Yields on 10-year U.S. Treasury bonds, used to benchmark interest rates for all sorts of debt, have been rising and are rubbing up against a 5% ceiling this month that some economists warn could trigger broader issues in the stock and debt markets. The 10-year first cleared 4.5% in May and has continued to climb higher despite efforts from the U.S. Treasury Department to buy back up to $6B in bonds to try to tamp down on the rate run-up.
Yields cleared 4.9% on Sept. 10, marking their highest level since 2023, and remained elevated while retreating by a few basis points on the CPI print.
A third of the rising headline CPI rate can be attributed to a 3.9% increase in gas prices, while housing costs rose by 0.3%. The massive investments being made in artificial intelligence were reflected in a 25.4% increase on consumer software and accessory purchases compared to last year, the largest on record.
The elevated inflation rate has coincided with continued resilience in the labor market, which added 162,000 jobs in August while revising the prior two months’ data to reflect the creation of an additional 55,000 positions than previously reported.
With the Fed’s dual mandate of maximum employment and price stability, the macroeconomic picture has added pressure on Fed Chairman Kevin Warsh, who is leading his third Fed meeting, to vote along with the central bank's Federal Open Market Committee to raise rates.
A rate hike would be the opposite outcome of the cuts that President Donald Trump and other administration officials have been calling for since before Warsh was even nominated to take over the post in January.
Advocates for rate cuts argue that the price hikes from the president’s tariff regime will only result in a one-time pop to inflation that will quickly wane and that added productivity from AI will help fuel economic growth and further job gains.
But Warsh signaled at a closely watched speech last month that he felt as though this was little reason to offer rate relief.
“Credit and loan markets are showing few signs of policy restraint,” Warsh told the audience in Jackson Hole, Wyoming. “Certain sectors like housing and agriculture are showing strains, but on balance, I would be hard-pressed to describe broad financial conditions as restrictive.”
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