Fed Rate Hike in September Seen as Likely After Strong Inflation Data
Strong CPI data boosts Fed rate hike chances. Experts predict 25bps increase amid rising inflation concerns.
POLICY WIRE — Washington, United States — A stronger-than-expected inflation report has significantly increased the chances of a Federal Reserve interest rate hike in September, marking the first such move since 2023.
The Consumer Price Index rose 3.4% annually in August, matching July’s level but exceeding the 3.3% forecast by economists. Gasoline prices alone contributed one-third of the monthly increase, surging 27.4% year-over-year, according to the Labor Department.
The core inflation measure, which excludes energy and food, rose 0.3% from July, up from 0.2% the previous month. This suggests broader inflationary pressures beyond energy, with fuel price increases affecting the wider economy. Following the release of the data, the probability of a rate hike at the Fed’s Sept. 16 meeting climbed to nearly 90%, up from 70% earlier in the week, per CME FedWatch.
EY-Parthenon now anticipates a 25 basis point rate increase at the upcoming meeting, pushing the federal funds rate target to 3.75% to 4%. Greg Daco, chief economist at EY-Parthenon, stated that the central bank is shifting from a hold to a potential hike, with some officials arguing that current disinflation rates are insufficient.
The Fed is set to announce its decision on Wednesday, Sept. 16, at 2 p.m. ET. The last rate increase occurred in July 2023, aimed at curbing inflation after pandemic-related spikes. Analysts suggest a September hike may not be the final move, with Capital Economics predicting further increases in December 2027 and March 2027.
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Raise borrowing costs for consumers, including mortgages, credit cards, and auto loans, while offering savers higher returns on CDs and high-yield accounts. The August data was recorded before recent fuel price surges, with oil crossing $100 a barrel and diesel surpassing $6 a gallon this week.
Nationwide’s Kathy Bostjancic warned that rising energy prices could drive up other goods and services, prompting the Fed to consider a rate hike. Several Federal Open Market Committee members have indicated support for an increase if inflation does not improve.
Last month, the Fed kept rates unchanged, though three members voted to raise them. Officials like Christopher Waller have signaled potential support for a September hike if inflation remains above target. The decision comes amid ongoing global price pressures from the Iran conflict, which has caused oil shortages and spiked energy costs.
Inflation is now one percentage point higher than it was before the Middle East conflict began in late February. Brent crude traded around $105 a barrel, while diesel prices broke above $6 a gallon this week. The Russia-Ukraine war also affects oil markets, with Ukrainian drone strikes disrupting Russian refining operations and causing fuel shortages.
Reporting by Policy-Wire (PW)
