Oil Prices Fuel Fed Hike Worries as Inflation Stays Above Target

High oil prices and record American diesel costs have fueled fears that the Federal Reserve will hike interest rates soon, despite concerns this may dent growth in the US economy. The Fed's two percent inflation target was left unchanged as US consumer inflation remained at 3.4 percent in August, in line with analyst expectations.

The European Central Bank raised eurozone borrowing costs earlier this week, citing the impact of energy costs from a Middle East conflict. Despite relief that inflation figures weren't worse, investors are resigned to the fact that the Fed will raise rates next week, according to Jack Ablin of Cresset Capital Management.

Oil prices retreated on Friday but remain at levels deemed too high by central banks, which are trying to keep inflation pressures from becoming entrenched in the wider economy. The average diesel price in the US climbed above $6 a gallon for the first time, while Brent oil almost touched $110 per barrel before falling back after the International Energy Agency cut its global oil demand forecast.

Despite the potential for a rate hike, some analysts argue that markets have already absorbed the likelihood of this through recent sell-offs. Meanwhile, Fed chairman Kevin Warsh may face opposition from President Donald Trump, who has launched an unprecedented campaign against the Fed's independence and is demanding lower interest rates to spur economic activity.