Fed Rate Hike Bets Soar as US Inflation Hits 3.7%

The US Federal Reserve's decision to raise interest rates is gaining ground after inflation came in slightly hotter than expected, challenging hopes that price pressures were easing. The personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 3.7% in July from a year earlier, accelerating from a 3.6% increase in June.

The latest figures suggest that inflation may not be cooling quickly enough to give policymakers a clear path towards lower rates, according to experts. Heather Long, chief economist at Navy Federal Credit Union, said, 'The United States still has an inflation problem.' The core PCE inflation, which strips out volatile food and energy prices, was 3.3% from a year earlier, no better than it had been in June.

Markets responded by increasing their bets on a rate increase at the Fed's next policy meeting in September. Fed funds futures prices now reflect about a 44% probability of a September Fed rate hike, up from about 36% immediately before the inflation report. Traders are also now fully convinced that the Fed will raise the policy rate by the end of the year.