Consumer prices in the U.S. continued to rise in August, increasing the likelihood that the Federal Reserve will raise interest rates as soon as next week.
According to the U.S. Bureau of Labor Statistics, the consumer price index (CPI) rose 0.4% in August on a seasonally adjusted basis. On an annual basis, inflation stood at 3.4%. Both figures were in line with analysts’ expectations, according to CNBC.
Core inflation, which excludes volatile food and energy prices, increased 0.3% for the month. That was 0.1 percentage point above forecast. On an annual basis, core CPI came in at 2.4%, matching expectations.
Markets are nearly certain of a rate hike
The report was the final major inflation reading before the Fed’s policy meeting, which will conclude on Wednesday with a decision on interest rates.
Following the release, traders sharply increased bets on a 0.25 percentage point rate hike. According to CME FedWatch, the probability of such a move rose to around 90%. Before the report, markets were pricing in roughly a 70% chance.
The federal funds rate is currently in a range of 3.5% to 3.75% and has remained there since the beginning of 2026.
Gasoline was one of the main drivers of inflation
Energy prices made the largest contribution to the increase in headline CPI. Gasoline prices rose 3.9% in August and accounted for more than one-third of the index’s monthly gain. The broader energy index increased 2.1% for the month and 16.3% from a year earlier amid rising tensions in the Middle East.
Food prices increased 0.1% for the month, while prices for food consumed at home were unchanged. On an annual basis, food inflation accelerated to 2.7%.
Shelter costs rose 0.3% after weaker increases in the previous two months. Transportation services increased 0.5%, used cars and trucks rose 0.4%, and new vehicle prices gained 0.3%.
Why markets closely watch U.S. inflation
Inflation directly affects the Fed’s interest rate decisions. If prices rise too quickly, the central bank may raise rates or keep them elevated for longer. That makes borrowing more expensive, reduces demand in the economy and pushes bond yields higher. If inflation slows, the Fed has more room to cut rates.
Fed decisions quickly spill over into other markets as well. Higher rates generally support the U.S. dollar and put pressure on stocks, especially technology shares, as well as gold and cryptocurrencies. U.S. borrowing costs also influence global capital flows, making inflation data important far beyond the American market.
Earlier, markets were awaiting the release of the August consumer price index.
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