Core inflation comes in hotter than expected. Fed rate hike looks inevitable

Core CPI came in hotter than expected early Friday, significantly increasing the likelihood that advisors and investors will see a rate hike from the Federal Reserve next week.

The Consumer Price Index is an important measure for inflation, and the latest numbers are in the spotlight ahead of the next meeting of the Federal Open Market Committee, which is on Sept. 15 and 16. 

Core CPI, or the index for all items less food and energy, rose 0.3% in August, after rising 0.2% in July, according to the U.S. Bureau of Labor Statistics. Economists surveyed by Dow Jones Newswires and The Wall Street Journal were looking for a 0.2% increase.

“The only thing that mattered for today’s print was the month-over-month core CPI increase –  the measure that strips out volatile food and energy – and this has come in higher than the 0.2% expected,” said Nic Puckrin, macro analyst and founder of Coin Bureau. “Fed Governor Waller said his vote would be heavily influenced by this print, and analysts almost unanimously identified this number as the make-or-break level for the Fed’s decision.”

Speaking at a recent Reuters event, Waller said that, if inflation didn’t cool, he would support a rate hike at next week’s FOMC meeting.

A rate hike would likely infuriate President Donald Trump, who has repeatedly called for the Federal Reserve to cut rates. The central bank made its last rate cut in December 2025, and has subsequently kept its policy rate steady at 3.5% to 3.75%.

The latest CPI number also comes amid rising energy prices as the Iran conflict continues.

“Apart from the hot core inflation, today’s print doesn’t even cover the most recent oil price spike above $100,” said Puckrin. “There’s little reason for the Fed to hold off on the hike next week – in fact, if it does, it may lose any credibility that Warsh has been painstakingly building since taking office.”

On a year-over-year basis, core CPI rose 2.4%, in line with economists’ expectations, after rising 2.5% in July.

After the CPI numbers came out the CME’s FedWatch tool put the probability of a rate hike to between 3.75% and 4% at 86.7%, up from 69.4% just before the numbers came out. The tool, which updates in real time, put the likelihood of rates being unchanged at 13.3%, down from 30.6% before the CPI numbers were released.

“The August CPI release was the last piece of puzzle ahead of next week’s FOMC rate decision and today’s stronger than expected print cements a hike as the base case,” said Jeff Schulze, head investment strategist at Franklin Templeton Institute.

The latest data  show that August’s CPI increased 3.4% over the last 12 months, in line with economists’ expectations and holding steady from a 3.4% increase in July.

On a seasonally adjusted basis, CPI increased 0.4% in August, in line with the forecast from economists surveyed by Dow Jones Newswire and The Wall Street Journal, after increasing 0.1% in July.

Earlier this week the Producer Price Index, another important indicator of inflation, came in as expected, although rate-hike odds climbed nonetheless.