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Consumer inflation numbers for August were released on September 11, and financial markets are signaling that the Federal Reserve will raise interest rates at the September policy meeting. But while investors expect the central bank to hike, economists aren’t so sure the Fed will pull the trigger. Who is right?
Will Inflation Trigger a Fed Rate Hike?
The Bureau of Labor Statistics published August's Consumer Price Index (CPI), a monthly snapshot of the prices of a basket of goods and services, from beef and eggs to smartphones and auto insurance. It is the go-to yardstick for measuring inflation in America.
Last month's numbers were mixed.
The annual headline inflation rate – from August 2025 to August 2026 – came in at 3.4%, unchanged from July. On a monthly basis, from July to August, consumer prices rose 0.4%. Both readings matched economists' expectations.
Markets are worried and believe the Federal Reserve needs to act.
However, core inflation actually brought a sigh of relief. Core consumer inflation strips out energy and food prices because they are highly volatile and something the US central bank cannot manage.
The 12-month core inflation rate decelerated to 2.4%, down just slightly from 2.5% in July. This is the lowest reading since March 2021. Meanwhile, core CPI edged up 0.3%, a little above the 0.2% prediction.
Overall, today's inflation is driven almost entirely by energy: crude oil, gasoline, and diesel. Looking ahead to September’s data, economists expect little change as the war in Iran rages on and keeps oil close to $100 per barrel.
Monetary Playbook
In this type of climate, the playbook for monetary policymakers is to look past an oil price shock. In other words, based on its past decisions, the Fed should not hike or cut rates since the situation in the Middle East is outside the century-old institution’s control.
But the European Central Bank (ECB) followed through with a hike in its three key interest rates, with economic observers calling it an insurance move. This means the ECB acted now to prevent higher energy inflation from spreading through the broader economy.
Could the Fed follow the same path? It is possible, but the US economy is different because Europe is a net energy importer. The United States is an energy superpower, exporting everything from crude oil to natural gas.
In addition, the numbers over the last few months indicate that inflation has yet to filter through the national economy. With 12 voting members on the rate-setting Federal Open Market Committee (FOMC), a majority would have to convince colleagues that overall consumer prices are surging because of the instability in global energy markets.
With interest rates up all over the world, the markets are already doing the Fed’s work!
Eyes on the Fed
The Federal Reserve will hold its next meeting on September 15 and 16. Traders have penciled in an 85% chance of a quarter-point increase to the benchmark federal funds rate – a key policy rate that influences business and consumer borrowing costs – which would bring it to a new target range of 3.75% to 4%.
This will be one of the most vital meetings in recent memory. Until the next one, that is!
