August CPI data could shape Fed's first rate hike in over three years

The U.S. Labor Department will release the August Consumer Price Index at 8:30 a.m. ET on Friday, providing the last major inflation snapshot before the Federal Reserve’s policy decision on Sept. 16. Analysts forecast a 3.3% year-over-year rise, down from a three-year peak of 4.2% in May, and a core CPI increase of about 2.4%.

Fed officials are weighing whether the recent slowdown signals a lasting trend or if inflation could remain stubborn amid higher fuel costs linked to geopolitical tensions in the Middle East. A rate increase would be the first since July 2023, when the central bank lifted borrowing costs to combat the strongest inflation in four decades.

"It's clear that the swing voters at the Fed are paying close attention to this inflation data," said Heather Long, chief economist at Navy Federal Credit Union.

"The [CPI] report is unlikely to alter the message of limited inflation progress and should provide sufficient support for the Fed to hike rates at the September meeting," Stephen Juneau, a U.S. economist at Bank of America Securities, wrote in a research note.

Fed Governor Christopher Waller indicated he would consider a hike "if inflation comes in hot," but noted he could hold rates steady if the data shows progress toward the 2% target. Chairman Kevin Warsh warned that the Fed would have "work to do" if inflation does not move down at a sufficient pace.

Market pricing on the CME FedWatch tool now reflects roughly a 70% chance of a rate increase to the 3.75%-4% range at the September meeting. Investors remain attentive to other price pressures, including elevated diesel costs, tariffs and rising health-care expenses.

Economists expect the core CPI trend, which excludes volatile food and energy items, to continue its decline that began in June, though they caution that layered supply shocks may affect the Fed’s assessment of longer-term price dynamics.