Traders have sharply increased bets on a US Federal Reserve rate hike next week after August inflation data showed underlying price pressures remained elevated.
Markets are now pricing in about a 90% probability of a quarter-percentage-point rate hike at the Fed's September 15-16 meeting, up from around 70% before the consumer price inflation report, according to Bloomberg.
The shift came after the US Consumer Price Index rose 0.4% in August, matching expectations, while the annual inflation rate stood at 3.4%, also in line with the Dow Jones consensus.
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However, core CPI, which excludes volatile food and energy prices, increased 0.3% month-on-month, coming in 0.1 percentage point above expectations. On an annual basis, core inflation was 2.4%, in line with estimates.
The August CPI report is the last major inflation reading the Fed will receive before its policy meeting next week, making it a key input into the rate decision.
Energy prices were a major contributor to the monthly increase. Gasoline prices jumped 3.9%, accounting for more than one-third of the overall CPI gain. The broader energy index rose 2.1% during the month and was up 16.3% from a year earlier, amid heightened tensions in the Middle East.
Shelter costs also increased 0.3%, after moderating over the previous two months. Transportation services rose 0.5%, while used cars and trucks gained 0.4%. New vehicle prices increased 0.3%.
Food prices edged up 0.1% in August, with food-at-home costs unchanged. The food index was up 2.7% from a year earlier.
The inflation data followed Thursday's producer price report, which showed US wholesale prices rose 5.4% in the 12 months through August. While the overall PPI increase was broadly in line with expectations, details pointed to renewed price pressures in areas including transportation, warehousing, hospital services and airfares.
Before the latest inflation data, economists remained divided over the Fed's next move. A Reuters poll conducted September 4-9 showed about 70% of economists expected the central bank to keep its federal funds rate in the 3.50%-3.75% range at the September meeting, while the remainder expected a 25-basis-point hike.
The poll had also shown a marked shift in expectations, with 90% of economists favouring a rate hold in August.
The Fed has kept its policy rate at 3.50%-3.75% since December. The central bank targets 2% inflation based on the annual change in the Personal Consumption Expenditures price index.
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