US CPI rises 0.4% as expected but core CPI higher: will the Fed hike rates?

The US Consumer Price Index rose 0.4% in August, accelerating from a 0.1% increase in July and adding to pressure on the Federal Reserve to tighten monetary policy at its meeting later this month.

The increase in headline CPI was in line with the Dow Jones consensus forecast.

Prices were also 3.4% higher in August than a year earlier, matching expectations.

However, the core CPI measure, which excludes volatile food and energy prices, rose 0.3% in August after increasing 0.2% in July.

The monthly increase was above the 0.2% economists had expected and could strengthen the case for a rate hike when the Fed concludes its policy meeting next week.

On an annual basis, core inflation eased to 2.4% from 2.5% in July, in line with expectations.

The report is the final major inflation reading the central bank will receive before its policy meeting, which concludes Wednesday with a decision on its benchmark interest rate.

Gasoline drives headline inflation higher

Energy prices were a major contributor to the August increase, with gasoline prices rising 3.9% during the month.

The increase accounted for more than one-third of the overall monthly rise in consumer prices.

The broader energy index rose 2.1% in August and was up 16.3% from a year earlier.

Food prices provided relatively little additional pressure.

The food index increased 0.1% in August, matching its July rise, while prices for food consumed at home were unchanged during the month.

The combination of persistent core inflation and a renewed energy shock has complicated the Fed's policy outlook.

Stock futures moved higher following the report, with S&P 500 futures up 0.5% and Nasdaq futures gaining 0.7%.

The market reaction came despite growing expectations that the central bank could raise rates as the traders seem to be pricing a rate hike.

Following Thursday's Producer Price Index release, traders raised the probability of a quarter-percentage-point rate increase to more than 73%, according to the CME Group's FedWatch gauge.

Rate hike expectations gain momentum

The latest inflation data follow a robust August employment report that had already increased expectations for tighter monetary policy.

Those expectations had weakened after Fed Governor Christopher Waller said at a Reuters NEXT Newsmaker event that he would be inclined to argue for keeping rates steady if incoming data confirmed that inflation pressures were cooling.

The latest CPI reading makes that argument more difficult, particularly because core inflation accelerated on a monthly basis.

Energy prices are also becoming an increasingly important risk.

The conflict involving Iran has pushed Brent crude prices above $100 a barrel, raising concerns that higher fuel costs could spread through the broader economy.

The European Central Bank raised its key interest rates earlier on Thursday in response to inflationary pressures associated with the war and higher energy costs.

Economist says Fed may need to reverse cuts

Joseph Brusuelas, principal and chief economist at RSM US, said the combination of the latest producer and consumer inflation readings pointed to a need for action from the Fed.

"Given that oil and distillate prices have meaningfully accelerated into September and are likely to be passed downstream to consumers, the combined August Producer Price, and Consumer Price Indices demand action out of the Federal Reserve at its next meeting," Brusuelas said.

He argued that several separate forces are now reinforcing inflationary pressures.

"The combination of war induced energy shock, tariffs resulting in higher inflation and the draw upon commodities and finished goods to support the buildout of artificial intelligence infrastructure are all pushing the price level higher," he said.

Brusuelas said it was time for the Fed to "rip up the textbook on looking through a wartime caused supply shock".

He argued that the three supply shocks had persisted long enough that policymakers could no longer reasonably treat them as temporary.

He pointed to rising gasoline, diesel and jet fuel prices, saying the increases were increasingly feeding into groceries and transportation costs across the service-based US economy.

Inflation puts Fed credibility in focus

Brusuelas said the central bank should reverse the three rate cuts it implemented in late 2025 and slow an economy that he expects to grow well above trend during the current quarter.

He pointed to nominal GDP growth above 6% in the second quarter, a deficit-to-GDP ratio above 6%, an economy at or near full employment and record corporate profits during the quarter.

By slowing demand, he argued, the Fed could shift some of the inflationary pressure currently being absorbed by households back onto corporate balance sheets through lower profit margins.

"The Fed needs to remove the three rate cuts that they implemented in late 2025 and slow an economy that is likely to grow well above trend in the current quarter," he said.

Still, Brusuelas acknowledged that the decision remains finely balanced.

"Granted that all of this is a difficult judgement-based call and is truly a coin flip at this juncture," he said.

But he argued that after the August PPI and CPI reports, and with the prospect of a less disinflation-friendly PCE reading ahead, keeping rates unchanged could create a credibility problem for the central bank.

"However, following the August PPI and CPI data and what will be not a disinflation friendly PCE for the Fed not to hike rates at its next meeting would be a blow to its own credibility," he said.

With inflation proving more persistent and energy prices adding a fresh source of pressure, the Fed's next decision is likely to hinge on whether policymakers view the latest acceleration as a temporary supply shock or evidence that broader price pressures are becoming entrenched.