While an underlying indicator came in marginally hotter than expected, headline U.S. consumer price rise advanced in August as predicted, increasing bets that the Federal Reserve could raise interest rates the following week. Overall consumer prices increased by 0.4% month-on-month in August, aligning with expectations and surpassing July’s growth rate of 0.1%.In the twelve months leading up to August, the consumer price index registered at 3.4%, aligning with economists’ projections and remaining consistent with the previous month. Petrol costs, in particular, surged by 3.9% compared to the previous month, representing more than one-third of the overall increase in all consumer items, according to the Labour Department’s Bureau of Labour Statistics. A metric tracking energy prices also increased by 2.1%. Analysts had been preparing for the repercussions of a resurgence in petrol pump prices. Data from the U.S. Energy Information Administration, as reported, indicates that petrol prices averaged $4.192 a gallon in August, an increase from $4.064 in July. Driving the increase was an energy shock initiated by the conflict in Iran. Now in its seventh month, the conflict has rendered the vital Strait of Hormuz largely inaccessible to tanker traffic, thereby obstructing a passage that previously facilitated the flow of approximately one-fifth of the global oil and liquefied natural gas supply prior to the onset of hostilities.

Military advances by Iran-backed Houthis in Yemen have raised concerns regarding shipping activity in the Bab el-Mandeb Strait, a crucial passage connecting the Red Sea with the Gulf of Aden. Brent crude futures, the global oil benchmark, surpassed $100 a barrel for the first time since July this week – although this increase occurred prior to the August CPI report. Meanwhile, a significant surge in expenditure on artificial intelligence infrastructure has also led to increased costs for components such as memory chips, data storage devices, and certain consumer electronics. The U.S. has implemented new tariffs on Canada, which may contribute to increased price pressures in the forthcoming months. Excluding the more volatile categories of food and energy, the “core” CPI recorded a month-on-month increase of 0.3%, surpassing expectations that it would align with July’s rate of 0.2%. Year-on-year, core CPI moderated to 2.4% as anticipated, compared to 2.5% in the prior month. Lodging away from home, airfares, education, and used vehicle costs all experienced increases over the month; however, these were partially counterbalanced by declines in medical care and car insurance prices. The Fed typically pays special attention to the core measure, as it is regarded by certain policymakers as an indicator of underlying price pressures.

Another key figure under the Fed’s scrutiny measures the prices of services, excluding energy and housing. Referred to as “supercore” inflation, this metric experienced a month-on-month increase of 0.5% and a year-over-year rise of 3%. Policymakers at the central bank have emphasised their commitment to addressing inflation in their upcoming meeting, fuelling speculation that the Fed may choose to increase rates after the two-day session on Wednesday. Fed Chair Kevin Warsh has indicated that the central bank will “have work to do” if price growth does not show signs of sustainably easing down to 2%, which is the Fed’s inflation target. Markets were assigning approximately an 86% probability to a quarter-point rate increase this month, a notable rise from the roughly 70% likelihood observed prior to the data, as indicated by CME FedWatch. “A hotter than expected core reaffirms the odds of a Fed hike at the next FOMC meeting,” analysts said in a note, referencing the rate-setting Federal Open Market Committee. Initial reaction in financial markets to the data was relatively subdued. Stock futures on Wall Street maintained their earlier gains, as the rate-sensitive 2-year U.S. Treasury yield experienced a slight increase, while the benchmark 10-year yield saw a modest decline. Yields typically exhibit an inverse relationship with prices. Some analysts have pointed out that there is still a possibility that the Fed may opt to maintain interest rates at their current levels, reflecting a decision akin to that made in July.

Fed Governor Christopher Waller has indicated that he was open to waiting “one more meeting” before lifting rates again, highlighting the need to “take a chance to see if disinflation continues.” New York Fed President John Williams has also argued that policy now seems to be in a “good place,” although he stressed that he was open to a hike if the data warranted it. Warsh has largely refrained from providing a comprehensive roadmap for borrowing costs, instead opting for vague outlines. In a recent address, he emphasised that the central bank must possess confidence that underlying inflation is progressing toward “our objective, clearly and at sufficient speed.” Complicating matters for Warsh is the presence of the individual who appointed him as Fed Chair earlier this year, President Donald Trump. The president has issued a warning regarding the potential cessation of a significant segment of U.S. trade contingent upon an increase in interest rates by the Fed. While “it’s hard to see” how the Fed can justify leaving rates on hold, “there’s no guarantee that the Fed will hike next week,” said Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management. “It is said that all Fed Chairs are tested within their first six months and with bond yields rising, inflation showing no signs of cooling, and a President who is calling for rate cuts (and will be incensed at rate hikes), Chairman Warsh is stuck between a rock and a hard place,” Zaccarelli added.