Inflation data fuels expectations of Fed rate hike as oil prices surge and Treasury yields near 5%

U.S. consumer prices rose more than expected in August, with core CPI up 0.3% and headline CPI climbing 0.4%, driven in part by a 3.9% jump in gasoline prices. The data pushed market expectations for a Federal Reserve rate hike at next week’s meeting to about 85%, up from roughly 70% before the release. Treasury yields on the 10-year note rose toward the psychologically significant 5% level, and equity indices moved higher despite the inflation surprise.

Federal Reserve Governor Christopher Waller indicated that even modest acceleration in inflation could prompt him to support a hike, filling the gap left by Chair Kevin Warsh’s ambiguous stance. The report also highlighted an unprecedented 5.9% rise in wireless telephone services, the largest increase recorded for that category, which contributed about one-third of the core CPI gain. By contrast, smartphone prices fell 1.7% month-over-month.

Analysts noted that the inflation surprise coincides with a bond-market sell-off that is tightening financial conditions. Adam Turnquist, chief technical strategist at LPL Financial, said rates have moved “from the stairs to the elevator,” and a clear break above 5% could bring 2006-2007 high-rate levels back into focus. > "With a 0.3% month-over-month increase in Core CPI, the Fed now finds itself with its back against the wall," said Chris Zaccarelli, chief investment officer at Northlight Asset Management. > "Bull markets don’t die of old age, they’re killed by the Fed," he added.

The broader economic backdrop includes slowing wage growth for the fifth consecutive month and consumer sentiment near record lows, underscoring the pressure on households from higher energy costs and tighter credit conditions.