Key facts
- US consumer price index rose 3.4% in the 12 months ending August.
- Core inflation rose 2.4% in the 12 months ending August.
- Market odds for a Fed rate hike exceeded 85%.
Market expectations for a Federal Reserve interest rate hike have significantly increased following the release of August inflation data. The Labor Department reported that the consumer price index increased 0.4% last month, and rose 3.4% over the 12 months ending in August. Core inflation, which excludes volatile food and energy prices, increased by 0.3% last month and 2.4% over the same annual period. According to CME's FedWatch tool, market odds for a rate hike now stand above 85%, with traders adding to bets for a quarter-point hike at the Fed's upcoming meeting. Omair Sharif, president of Inflation Insights, noted the importance of the Fed delivering on its promises to maintain credibility, especially after recent communications. Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, stated that markets are closely watching for actions from the Fed that demonstrate a willingness to combat inflation, beyond just words. The potential for a rate hike, even if it occurs close to an election, could be seen by some as a necessary step to prevent higher borrowing costs in the future, potentially lowering long-term rates due to increased confidence in the central bank's resolve.