Fed Hikes Odds Surge to 90% on Surprising Inflation Reading

The Federal Reserve's inflation fight just got more challenging after August's core Consumer Price Index surprised to the upside. The Bureau of Labor Statistics reported a 0.3% month-over-month increase, exceeding economists' predictions of 0.2%. This unexpected rise has pushed the probability of a 25-basis-point rate hike at the September 16 FOMC meeting to 90%, up from roughly 70% just 24 hours earlier.

The core CPI rose 2.4% on a year-over-year basis, while headline CPI was even more aggressive, increasing 3.4% year-over-year. Energy costs are a significant contributor to this upward pressure, with oil prices creeping toward $100 per barrel and impacting transportation, manufacturing, and supply chains that rely on fuel.

The current Fed target range sits at 3.50% to 3.75%. If the FOMC hikes by 25 basis points next week, that range would move to 3.75% to 4.00%.

Markets were initially pricing in multiple rate cuts over the course of the year, but data has continued to surprise on the upside. Job growth remains robust, consumer spending is holding firm, and inflation readings refuse to roll over. This shift in expectations has led futures markets to reflect an increasing likelihood of one to two additional rate hikes before year-end.