US Core Inflation Surges, Fed Rate Hike Probability Soars to Over 85%

The US core inflation rate heated up in August, surpassing expectations and increasing pressure on the Federal Reserve to raise interest rates. According to data released by the Bureau of Labor Statistics, core CPI rose 0.3% month-over-month and 2.4% year-over-year, its lowest level in five and a half years. This unexpected increase has pushed market bets for a Fed rate hike in September to over 85%, up from around 70% just the previous day.

Omair Sharif, founder of Inflation Insights, stated that the Fed must now prove its determination to fight inflation through action. Federal funds futures show investors expecting another possible hike by December, with institutions like TD Bank and JPMorgan adjusting their forecasts in response to the data.

Federal Reserve Chairman Warsh's previous hawkish remarks have drawn attention to next week's meeting, making it increasingly difficult for him not to support a rate hike. With three officials voting in favor of a 25-basis-point hike at the July meeting, and oil prices adding further inflationary pressure, a rate hike is seen as essential to preserving Warsh's policy credibility.

The market has largely concluded that the Fed will raise rates next week for the first time in three years. However, investors are now focused on the subsequent path of rate hikes, with expectations of at least three increases by June next year, higher than previously expected.