Inflation Data Slightly Increases Likelihood of Fed Rate Hike

The Federal Reserve's interest-rate hike decision has gained some momentum after a recent government report showed inflation in July was slightly stronger than expected. The 12-month gain in the personal consumption expenditures price index, which the Fed targets at 2%, edged up to 3.7% last month from 3.6% in June.

This development comes as the Fed has held its policy rate steady in the 3.50%-3.75% range since December. While Fed Chairman Kevin Warsh has vowed to end above-target inflation, he has not given any indication about whether he believes it will recede without interest-rate hikes.

Economist Heather Long from Navy Federal Credit Union stated that 'The United States still has an inflation problem.' She noted that the latest data give Warsh time to wait and see, but he needs to be more clear about what he's watching closely and what it would take for him to hike rates.

The probability of a September Fed rate hike now reflects about 44% versus around 36% immediately before. Traders are fully convinced that the Fed will have raised the policy rate by the end of the year.