Fed Rate Hike Odds Surge to Nearly 90% Amid Accelerating Inflation

The US inflation rate has accelerated, prompting a surge in expectations that the Federal Reserve will hike interest rates next week. Interest rate futures now show a nearly 90% probability of a 25-basis-point hike in September, up from about 70% before the data release.

Nick Timiraos, the Wall Street Journal's chief economics correspondent, warned that if the Fed acts, it likely won't stop after just one hike, it would mark the beginning of a sustained tightening cycle. Markets are now betting on at least three additional rate hikes by June of next year.

The August Consumer Price Index (CPI) rose 3.4% year-over-year, above market consensus of 3.3%, while the month-over-month increase jumped sharply from 0.1% in July to 0.4%. Core CPI, which excludes food and energy, also exceeded economists' expectations.

Historically, the Fed has rarely believed a single hike could reverse an inflation trend. Current Fed Governor Christopher Waller said if inflation remains persistently above target, rates must genuinely reach sufficiently restrictive levels, a single marginal adjustment cannot bring inflation back to the 2% target.