A stronger-than-expected core inflation reading on Friday sharply increased expectations for a Federal Reserve rate hike next week.
Markets raised the probability of a quarter-point increase to around 85%, up from roughly 70% before the inflation report.
Core CPI Comes In Hotter Than Expected
The Bureau of Labor Statistics reported that core CPI rose 0.3% in August, above the 0.2% consensus forecast.
Core inflation excludes volatile food and energy prices and is closely watched by Federal Reserve policymakers.
Headline CPI increased 0.4% month over month, matching expectations, as gasoline prices rebounded after two consecutive monthly declines.
On an annual basis, headline inflation remained at 3.4%, while core CPI eased slightly to 2.4% from 2.5% in July.
Analysts See Higher Chance of September Fed Hike
CIBC Economics economist Helen Lao said the stronger core inflation reading could be enough to push more Federal Open Market Committee members toward supporting a rate increase.
The data arrived only days before the Sept. 15-16 FOMC meeting.
Markets now widely expect the central bank to deliver its first rate increase since July 2023.
Treasury Yields Move Higher
Rising expectations for tighter monetary policy have also pressured U.S. government bonds.
The 10-year Treasury note auction on Sept. 9 cleared at 4.834%, compared with 4.683% at the previous auction.
The 30-year Treasury auction on Sept. 10 produced a yield of 5.308%, up from 5.216% previously.
Higher yields reflect growing investor concern that the Federal Reserve may need to maintain a more restrictive policy stance.
Rate-Sensitive Stocks Face Pressure
A Fed rate hike could weigh on rate-sensitive parts of the equity market.
Utilities and real estate investment trusts are particularly exposed because higher borrowing costs can pressure margins and make dividend-paying stocks less attractive relative to bonds.
Investors are therefore closely watching sectors that tend to underperform when interest rates rise.
PPI and Oil Add to Inflation Concerns
Friday’s CPI report followed another strong inflation reading on Thursday.
The Producer Price Index showed that U.S. wholesale prices rose 0.4% in August and 5.4% year over year.
Energy prices are also adding to inflation concerns.
Brent crude has remained above $100 per barrel, supported by renewed geopolitical tensions linked to Iran.
Higher oil prices can feed into transportation, manufacturing and consumer costs, making it more difficult for the Federal Reserve to declare inflation under control.
ECB Adds to Global Tightening Trend
The European Central Bank also reinforced the broader global tightening theme.
On Sept. 10, the ECB raised its deposit rate to 2.50% from 2.25%.
Its main refinancing rate also increased to 2.65% from 2.40%.
The move highlighted how higher energy prices and inflation pressures are influencing central banks across major economies.
Fed Policy Outlook Has Shifted
The Federal Reserve has kept its policy rate in the 3.50% to 3.75% range since December 2025.
Many analysts had previously expected that pause to continue well into 2027.
However, the outlook changed after Fed Chair Kevin Warsh delivered a more hawkish message at Jackson Hole in late August.
That speech pushed shorter-term Treasury yields higher and strengthened expectations that the Fed could resume tightening.
Markets Turn to the FOMC Decision
Investor attention now shifts to the upcoming Federal Reserve decision.
The FOMC is set to announce its interest-rate decision alongside updated economic projections.
With inflation remaining sticky, Treasury yields rising and energy prices elevated, markets increasingly expect the Fed to raise rates by 25 basis points.
