The Federal Reserve is now widely expected to raise interest rates at its policy meeting next week, after new data showed inflation remained stubbornly high in August, fueled in part by rising energy costs tied to the ongoing conflict with Iran.
The consumer price index (CPI) released Friday by the Bureau of Labor Statistics showed prices rose 0.4% in August and 3.4% over the past 12 months, unchanged from July and still well above the central bank's 2% target. Core CPI, which strips out volatile food and energy prices, came in hotter than expected, ticking up 0.3% last month.
"That was not what the Fed wanted to see," said Ryan Nunn, director of research for the Budget Lab. "It would like to see continued decline in inflation, and markets are responding to this by increasing their expectation of a rate hike next week."
Investors are now pricing in an 87% chance that the Federal Open Market Committee will raise its benchmark rate by a quarter percentage point when it meets Tuesday and Wednesday, according to the CME FedWatch tool. That would mark the first hike since the central bank held rates steady in July.
The political backdrop is tense. President Trump has publicly pressed Fed Chair Kevin Warsh to cut rates, but Warsh has signaled that price stability is the priority. "None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target," Warsh said last month at Jackson Hole. "So the Fed's predominant focus right now should be on prices."
White House spokesperson Kush Desai argued the data "reinforces how President Trump's targeted policy interventions are paying off, with dramatic month-over-month price reductions for beef, prescription drugs, and car insurance." He added that these policies "will continue delivering as energy supplies increase, markets stabilize, and overall inflation declines again."
But energy prices are a major wildcard. Gasoline prices jumped 3.9% in August alone, accounting for more than a third of the monthly increase. Oil prices have surged past $100 a barrel as the conflict with Iran escalates, and diesel hit a record $6.05 a gallon, up 63% from a year ago, according to AAA.
"This surge in energy prices will probably tip the scale to a hike at next week's meeting," said Bill Adams, chief U.S. economist at Fifth Third Commercial Bank.
The labor market remains solid, with employers adding 162,000 jobs in August, which gives the Fed room to focus on inflation. "On the employment side of the Fed's dual mandate, our country is doing well," Warsh said. "But on the price-stability side of our mandate, the numbers are more concerning."
Some economists argue the Fed has waited too long. "This is a standard problem now with the Fed and the way it's been doing policy over the past five or six years is that they tend to respond to economic developments way too slowly," said Jai Kedia of the Cato Institute. "The macroeconomic realities were much worse the whole year when they chose not to raise."
Others see room for patience. Lindsey Piegza, chief economist at Stifel Financial, noted that year-over-year core CPI has cooled to 2.4%, a multiyear low. "There is still a sizable portion of the committee that would support a more patient approach," she said, echoing Fed Governor Chris Waller's willingness to "give disinflation a chance."
As Warsh prepares for the meeting, he faces mounting pressure from Trump, who has long feuded with Fed leadership over rate policy. The president has given Warsh some breathing room so far, but it remains unclear how long that will last.
