Inflation in the U.S. in August came in slightly above expectations. What can we expect from the Fed now?

The Consumer Price Index (CPI) in the U.S. rose 3.4% year-over-year and 0.4% month-over-month in August, according to the U.S. Bureau of Labor Statistics. On a core basis—excluding volatile food and energy prices—the index rose 2.4% and 0.3%, respectively.

The headline index on an annual basis exceeded expectations (3.3%, according to estimates cited by Barron’s) and matched July’s growth rate. On a monthly basis, economists’ forecasts were accurate, but the actual result was stronger than July’s growth rate (0.1%). On a core basis, the market had forecast the same 2.4% year-over-year, but had expected a lower monthly rate of 0.2%.

This is the latest release of inflation statistics ahead of the U.S. Federal Reserve (Fed) meeting scheduled for September 15–16. Bloomberg has called these figures among the most important in recent years. Prior to the CPI release, the market had priced in a 69.4% probability of a Fed rate hike; after the data came out, that figure surged to 90.4%, according to the FedWatch tool.

"Now, a decision by the Fed to leave the rate unchanged would come as a surprise to the market. If it doesn’t raise rates, [Federal Reserve Chair Kevin] Warsch will have to present compelling arguments in favor of such a move,” says Ira Jersey, chief interest rate strategist at Bloomberg Intelligence.

Futures on the major U.S. stock indices accelerated their gains immediately after the data was released: S&P 500 futures rose about 0.7%, Nasdaq 100 futures rose 0.8%, and Dow Jones Industrial Average futures rose 0.4%. Half an hour later, all three accelerated their gains and were up 0.8–1% each.

The 2.4% increase in the core [index] was the lowest since March 2021—a period before the cost-of-living crisis began, Bloomberg notes. On the other hand, the 0.3% monthly increase was the strongest since April, the agency added. The stock market’s reaction may be linked to the fact that investors were already confident, even before the data was released, that the Fed would raise rates next week, and the statistics merely confirmed their view, the agency suggests.

The rise in prices is also being driven by falling oil prices: on September 11, the price of Brent crude fell from nearly $110 per barrel to a low of $103.5.

Inflation in the U.S. remains well above the central bank’s 2% target. And an unexpectedly strong labor market report in early September meant that the Federal Reserve might focus on one aspect of its mandate—price stability, Morningstar wrote.

The CPI index has been released, and the Fed meeting will take place against the backdrop of an unprecedented rise in fuel prices. On Friday, September 11, diesel prices in the U.S. exceeded $6 per gallon for the first time in history. Rising gasoline prices were the key driver behind the monthly increase in consumer prices in August to a three-month high, Morningstar noted. “The resilience of the core CPI reflects higher energy prices in August following two consecutive months of declines,” noted Halim Aburashid, Vanguard’s U.S. economist.

On Thursday, the Producer Price Index (PPI) on a year-over-year basis slightly exceeded expectations, coming in at 5.4% versus Bloomberg’s estimate of 5.3%. Producer prices, together with the CPI, provide a fairly accurate estimate of the PCE—the personal consumption expenditures index, the Fed’s preferred measure of inflation, Barron’s reported. The actual PCE for August will be released on September 30. Following the release of the producer price data, economists raised their PCE forecasts to 0.3% on a monthly basis, Barron’s added.

This article was AI-translated and verified by a human editor