US core inflation beats forecasts, lifting rate-hike odds to 90%

Key Points

1. Consumer prices rose 0.4% in August; core inflation climbed 0.3%, above Bloomberg's 0.2% forecast.
2. Gasoline prices jumped 3.9%, contributing more than a third of the monthly headline increase.
3. Markets now price a 90% chance the Federal Reserve raises rates next week.

The latest:

Core US inflation ran hotter than Wall Street expected in August, rising 0.3% against a 0.2% consensus, according to Bureau of Labor Statistics data released Friday. Headline consumer prices rose 0.4% on the month, in line with forecasts, lifting the annual rate to 3.4%. Traders responded by pushing the odds of a Federal Reserve rate increase next week to 90%.

Details:

• The numbers: The consumer price index rose 0.4% in August from July, matching analyst expectations, according to Bureau of Labor Statistics data. The core index, which strips out food and energy, rose 0.3%, above the 0.2% median forecast compiled by Bloomberg. Annually, headline inflation accelerated to 3.4% and core to 2.4%.
• The fuel driver: Gasoline prices climbed 3.9% during the month and accounted for more than a third of the monthly increase in the headline index. That followed a run-up in global crude prices above $100 a barrel, which fed directly into American pump costs over the summer.
• The war factor: The oil surge is tied to the Iran war that began in February, which pushed global crude above $100 a barrel and passed through to US fuel costs. Tariffs and a boom in artificial-intelligence infrastructure investment are cited as additional inflation drivers this year.
• Market repricing: Odds of a Federal Reserve rate increase at next week’s meeting jumped to 90% after the report. They stood near 70% the day after producer price data and at 40% following the personal consumption expenditures figures released on 26 August.
• The Fed’s posture: Fed Chair Kevin Warsh has been reluctant to signal the central bank’s next move. He hinted last month that there would be work to do if he could not be confident core inflation was heading toward target fast enough.
• Bond reaction: Yields on 10-year US Treasury notes rose to their highest level since 2023 following the inflation release, reflecting investor expectations of tighter policy ahead and a longer period of elevated borrowing costs.
• Housing costs: Mortgage rates reached their highest level in more than a year, tracking the move in long-term Treasury yields. Higher financing costs tighten conditions for homebuyers already facing elevated prices.
• Who absorbs it: The bulk of the impact from any rate increase is expected to fall on the American consumer, through higher costs on mortgages, credit and other household borrowing rather than on corporate balance sheets.
• Also: Ten-year Treasury yields hit their highest level since 2023.

Background:

The Federal Reserve targets 2% annual inflation. Core inflation at 2.4% and headline at 3.4% both sit above that threshold, which is why a single monthly reading above forecast carried outsized weight in market pricing this week.

Between the lines:

The repricing from 40% to 90% across three data releases shows markets moved on accumulating evidence, not one report. Warsh’s conditional language last month set the trigger: confidence that core inflation is converging on target. August’s 0.3% core print, above consensus, cut against that condition. With yields at 2023 highs and mortgage rates at a one-year peak, financial conditions have already tightened ahead of any formal decision.

What’s next

The Federal Reserve meets next week, with markets pricing a 90% probability of a rate increase. Watch whether Warsh addresses the core inflation trajectory directly, and whether Treasury yields and mortgage rates extend their advance.