The prospect of a fresh US interest-rate rise has moved sharply into view after August inflation accelerated more than expected, putting Federal Reserve chair Kevin Warsh under renewed pressure before next week’s policy meeting.
Core consumer prices, which exclude food and energy, increased by 0.3% in August against forecasts for a 0.2% rise. The headline consumer price index advanced 0.4%, while petrol prices climbed 3.9%.
Markets now put the likelihood of a quarter-point increase at roughly 85%, up from about 70% before the figures were released. The meeting of the Federal Open Market Committee is scheduled for 15 and 16 September.
The data followed a stronger-than-anticipated producer-price report. The US Bureau of Labor Statistics said producer prices for final demand rose 0.4% in August, with goods prices increasing 1.1% and energy prices jumping 4.2%. Diesel fuel rose 24.1% during the month. ([bls.gov](https://www.bls.gov/news.release/ppi.nr0.htm?utm_source=openai))
Christopher Waller, a Federal Reserve governor, had already warned that a modest deterioration in the inflation data could change his position. In a speech on 3 September, he said that if August figures showed progress towards the Fed’s 2% inflation goal had stalled, he could support raising interest rates. ([federalreserve.gov](https://www.federalreserve.gov/newsevents/speech/waller20260903a.htm?utm_source=openai))
“It may not take much acceleration in inflation” to persuade him to back tighter policy, Waller said. His comments gave investors a clearer indication of how the central bank could respond after Warsh had left the timing of its next move uncertain.
The bond market has amplified the pressure. The yield on 10-year US Treasury bonds moved towards 5%, a level that would mark a significant increase in borrowing costs for households, businesses and the government.
Adam Turnquist, chief technical strategist at LPL Financial, said interest rates had recently “traded the stairs for the elevator”. He warned that a sustained move above 5% could bring the 2006 and 2007 highs of about 5.25% to 5.35% back into focus.
For consumers, the figures offered little relief from a difficult year. Wage growth has slowed for a fifth consecutive month, while sentiment among American households remained close to a record low.
Gregory Daco, chief economist at EY-Parthenon, wrote on X: “We haven’t seen this type of income squeeze since 2012.”
Some of the monthly inflation increase was concentrated in wireless telephone services, whose prices rose 5.9% in August. The Bureau of Labor Statistics recorded the category’s biggest increase, although the figures suggest it may have distorted the underlying picture: excluding mobile phone services, core inflation would have been closer to 0.2%.
Smartphone prices themselves fell 1.7% during the month and were down 12.2% from a year earlier. Prices for telephone hardware dropped 2.4%.
Investors have nevertheless been left to weigh the temporary effect of telephone charges against more persistent risks from energy and financial markets. Oil has moved back above $100 a barrel, raising the prospect of higher costs for transport, plastics and other goods in the months ahead.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the latest figures left the Fed with “its back against the wall”.
US shares rose despite the inflation surprise, suggesting that investors had largely absorbed the prospect of higher rates. The immediate test will be whether the technology-led rally can continue while oil prices rise, Treasury yields approach 5% and the Federal Reserve considers resuming rate increases.
