Stripping out volatile food and energy prices \u2014 the way the Fed likes to scrutinize underlying inflation \u2014 the Consumer Price Index rose 0.3% month over month<\/a>, compared with expectations for 0.2%. The year-over-year rate was in line with expectations for 2.4% and down a tenth of a percentage point from July. On a headline basis, CPI rose 3.4% in August, in line with expectations, and 0.4% month over month. <\/p>\n “The upside surprise to core CPI in August means the Fed looks set to hike next week,” said Stephen Brown, North America chief economist for Capital Economics. <\/p>\n Markets are now betting on a 90% chance of a rate hike at Wednesday’s Fed policy meeting, according to CME FedWatch<\/a>. <\/p>\n Officials will use the latest inflation data to examine trends over the past three, six, and 12 months to assess whether price pressures are easing. <\/p>\n Fed officials have been divided<\/a> about whether inflation is falling back down to their 2% goal on its own or whether they need to raise rates. Friday’s data will fuel hawks like Cleveland Fed president Beth Hammack and Dallas Fed president Lorie Logan, who argue that inflation is broad-based and that without increasing rates, it won’t come down on its own. <\/p>\n Read more:\u00a0How to protect your savings against inflation<\/a> <\/p>\n It may also not be enough to satisfy officials like Fed governor Chris Waller, who said last week that if August figures show inflation coming down and core prices staying at 0.2%, he would support holding rates steady next week. <\/p>\n “If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level,” Waller said on Sept. 3. “But if inflation comes in hot, I would consider a rate hike. I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy.” <\/p>\n Fed Chairman Kevin Warsh said in a speech at Jackson Hole, Wyo.,<\/a> last month that inflation is too high and that rates are not restricting borrowing in the economy, outside of housing. He noted that June and July inflation readings, which had shown some progress, hadn’t been enough for him to mark the improvement he needs to see that inflation is coming down. <\/p>\n “Following a brief easing in June and July, inflation surged again in August which sets the stage for a likely interest rate hike,” RSM chief economist Joseph Brusuelas said. He expects the Fed to hike at least two more times after next week over the next year to put inflation on a credible path back to 2%. <\/p>\n Story Continues <\/p>\n Read more:\u00a0How the Federal Reserve shapes consumer loan rates<\/a> <\/p>\n New York Fed president John Williams has said that if monthly readings on inflation consistently came in at 0.2% on the Personal Consumption Expenditures index (PCE) \u2014 another inflation measure and the Fed’s favored yardstick \u2014 then that would indicate inflation is coming down. <\/p>\n Fed officials will use CPI along with data on wholesale prices<\/a> released Thursday to back into estimates for PCE. <\/p>\n Capital Economics economist Brown estimates core PCE rose by 0.27% month over month in August, with that figure unlikely to be much affected by the forthcoming revisions to the portfolio management and software and accessories price calculations. Without taking those revisions into account, that monthly estimate implies that annual core PCE inflation would rise from 3.3% in July to 3.4%. <\/p>\n “In short, core PCE inflation is moving in the wrong direction, and that should be enough for the centrists on the FOMC such as Governor Christopher Waller to support a hike next week,” Brown said. <\/p>\n Renewed oil shock <\/p>\n The surge in oil over the past week also threatens to reframe the Fed debate. <\/p>\n “The policy question is now not so much whether August CPI broadly confirms the summer improvement in the inflation data but rather whether that summer improvement provides sufficient reassurance for the Fed to look through a renewed oil supply shock with outsized impact on diesel and other refined products,” said Krishna Guha, head of central bank strategy and economics for Evercore ISI. <\/p>\n Standard procedure is for the Fed to look through oil price shocks and focus on underlying inflation dynamics. However, with inflation having remained above the Fed’s 2% goal for five and a half years and the oil price shock coming on top of a series of shocks \u2014 from tariffs to the war in Ukraine to the pandemic \u2014 they’ll unlikely be able to continue looking through it. <\/p>\n Brusuelas said it’s time for the Fed to “rip up the textbook” on looking through a wartime-caused supply shock, noting that three supply shocks have lasted long enough that it’s no longer appropriate to identify them as transitory. <\/p>\n “The best monetary policy is forward-looking, and seven months into what was thought to be a short-term conflict has simply turned into something else, which now requires a rational policy response from the Federal Reserve,” he said. <\/p>\n But there’s still a “hold” camp among Fed watchers. <\/p>\n “On the month this morning’s release pushes the Fed into an almost certain hike in September. But I still don’t think the economic data merit that because more broadly, there’s no real sign of inflation problems stemming from strong consumer demand in CPI data,” Wilmington Trust chief economist Luke Tilley said in an interview. <\/p>\n “So, they’ve almost backed themselves into a corner.” <\/p>\n Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms<\/a> and on Instagram<\/a>. <\/p>\n Click here for the latest economic news and indicators to help inform your investing decisions<\/a> <\/p>\n Read the latest financial and business news from Yahoo Finance<\/a> <\/p>\n <\/a> Produce is offered for sale at a grocery store in Chicago on Sept. 10, 2026. The Consumer Price Index report, a barometer of the annual inflation rate, was released on Sept. 11 and showed prices rose 0.3% month over month. (Scott Olson\/Getty Images) \u00b7 Scott Olson via Getty Images <\/p>\n