U.S. consumer prices continued to rise in August at a pace that markets interpreted as strengthening the case for a Federal Reserve rate increase as soon as next week. According to the Bureau of Labor Statistics, the consumer price index, or CPI, rose 0.4% on the month, bringing the 12-month inflation rate to 3.4%. Both readings were in line with forecasts.
Core CPI, which excludes volatile food and energy prices, increased 0.3% over the month, or 0.1 percentage point above expectations. On an annual basis, core inflation stood at 2.4%, matching estimates.
The report is the last major inflation reading the Fed will receive before next week’s policy meeting, which concludes on Wednesday with a vote on its key interest rate. After the data, traders stepped up bets that the Federal Open Market Committee will raise its benchmark rate by a quarter percentage point. CME Group’s FedWatch gauge showed the odds of such a move climbing to nearly 90%.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, said there is no guarantee the Fed will hike next week, but added that it is difficult to see how the central bank could justify keeping rates unchanged.
Market reaction was mixed. Stock futures moved higher as oil prices fell in morning trading, while U.S. Treasury yields were uneven. The policy-sensitive 2-year Treasury yield rose 4.6 basis points to 4.594%.
Energy was the main driver behind the headline inflation number. Gasoline prices jumped 3.9% in August, accounting for more than one-third of the overall increase in the index. The broader energy index rose 2.1% amid escalating tensions in the Middle East and was up 16.3% from a year earlier. Over 12 months, gasoline prices climbed 27.4% and fuel oil surged 52%.
Food prices edged up 0.1% for the month, while food at home costs were unchanged. The food index rose 2.7% on an annual basis.
Another notable contributor was a 0.3% increase in shelter costs, after some moderation over the previous two months. Transportation services rose 0.5%, used cars and trucks gained 0.4%, and new vehicle prices increased 0.3%, pointing to broadly based price pressures. Tariff-sensitive apparel prices were unchanged, while motor vehicle insurance fell 0.8%.
Before the CPI release, markets had already priced in nearly a 70% probability of a quarter-point increase. Still, some investors had argued that the Federal Open Market Committee’s decision could hinge on even hundredths of a percentage point in the inflation data.
Fed Chair Kevin Warsh has previously stressed the central bank’s commitment to bringing inflation back to its 2% target and said recently that if the numbers do not improve, “we have work to do.” Markets broadly read those remarks as supportive of a rate hike, though several other officials in recent weeks had argued for a more patient approach.
Kathy Bostjancic, chief economist at Nationwide, said Warsh and other officials had signaled that rates could remain on hold only if disinflation continued, and that the August report did not provide that outcome. She added that renewed increases in oil, gasoline and diesel prices are heightening concerns that higher energy costs could spill over into other goods and services, as well as inflation expectations.
Nationwide now expects a quarter-point hike next week. The fed funds rate, a benchmark for multiple consumer loans, has remained in a 3.5%-3.75% range throughout 2026.
