August CPI report could spark the Fed's first rate hike in over 3 years

Tomorrow's Consumer Price Index report could signal the Federal Reserve's first interest rate hike in over three years. The August CPI report, released at 8:30 a.m. ET on Friday, will be the last major inflation snapshot before the Fed's September 16 decision. Economists anticipate prices increased 3.3% annually in August, down from a May high of 4.2%.

The report will help Fed officials decide if the recent easing is a trend or persistent inflation fueled by high fuel prices due to the Iran war. Raising borrowing costs is the Fed's primary tool to curb inflation. At the previous meeting, nearly half of policymakers backed a rate hike later this year. A rate increase next week would be the first since July 2023, when the Fed tackled its highest inflation in four decades.

Fed Governor Christopher Waller suggested considering a hike if inflation is "hot." Fed Chairman Kevin Warsh warned that the Fed would have to work if inflation doesn't drop toward the 2% target at a sufficient speed. The Fed has held its benchmark rate at 3.5% to 3.75% since December 2025, but markets now predict a 70% chance of a rate hike to 3.75% to 4% at the September meeting.

Inflation is driven by factors like tariffs, rising health insurance costs, and AI expenditures. Economists expect the report to show an annual inflation rate of 3.3% in August, slightly below July's 3.4%. However, they will focus on core inflation—excluding volatile energy and food categories—when assessing if higher energy prices are passed on to goods and services.