August US CPI climbs 3.4% YoY, boosting expectations of a Fed rate hike next week

August consumer prices rose 0.4% on the month and 3.4% from a year earlier, matching the LSEG consensus and leaving the annual rate unchanged from July's reading. The detail was less tidy than the headline: core CPI, which strips out gasoline and groceries, rose 0.3% on the month, slightly hotter than the LSEG estimate and an uptick from July's 0.2%, while the 2.4% annual core rate came in a shade cooler than the prior month's 2.5%. Energy did most of the work, rising 2.1% on the month and 16.3% on the year, with the BLS noting that gasoline alone accounted for more than a third of the headline increase.

The report lands days before the Federal Reserve's September 15-16 meeting, and it did not settle the argument inside the building. Chair Kevin Warsh used his August 28 Jackson Hole speech to say that inflation is running above the 2% target and that "the Fed's predominant focus right now should be on prices," adding that better-than-expected summer PCE and CPI readings did not tell him underlying trends had meaningfully improved. Headline PCE inflation is running at 3.7%. Governor Christopher Waller and New York Fed President John Williams went into the final stretch more inclined to wait, with Waller telling a Reuters event on September 3 that "recent data suggests we are finally seeing some signs of disinflation" and that he would be inclined to hold.

Markets read it as a hike. CNBC reported that odds of an increase next week rose past 85% on Friday after the release, against a 2% target the 3.4% print sits well above (cnbc.com, "Consumer outlook plunges in September as inflation outlook worsens", September 11). Alexandra Wilson-Elizondo of Goldman Sachs Asset Management called the outcome "broadly as expected" but said it "does make next week's rate decision a jump ball," noting that the survey period predates the latest leg higher in energy, with Brent crude above $100 as Strait of Hormuz tensions persist. In other words, the August data may understate what September will show.

The components worth watching from here are the ones energy is currently masking. Shelter rose 0.3% on the month and is up 3.0% annually, airline fares jumped 2.7% on the month and 23.4% on the year on higher jet fuel costs, and food rose 0.1% monthly and 2.7% annually. For rate-sensitive equities the question is not this print but whether Warsh chooses to act over a data-dependent minority, a decision that also carries political freight ahead of the November 3 midterms. A hike would tighten financial conditions and lift borrowing costs across the economy, while a hold after repeated inflation warnings could complicate the Fed's messaging the next time it signals.