US braces for inflation report that may push Fed to hike rates

Since the US-Israel strikes on Iran began in late February, consumer prices in the United States have been on the rise. As the war with Iran drives up energy costs, all eyes are now turning to the Labor Department's upcoming Consumer Price Index (CPI) report on Friday. This report could potentially lead the Federal Reserve (Fed) to hike interest rates for the first time in over three years, as policymakers meet next week.

A steady or higher inflation figure, especially when volatile components are excluded, may nudge the Fed into raising interest rates during their meeting. However, such a move could face opposition from President Donald Trump, who has been advocating for lower interest rates. Trump even made a surprise threat to cut trade ties with certain countries.

According to Navy Federal Credit Union chief economist Heather Long, the data from Friday's report will likely seal the deal for a Fed rate hike in September if it aligns with expectations or exceeds them. EY Parthenon chief economist Gregory Daco anticipates policymakers will focus on core inflation, which excludes volatile food and energy prices, during their rate decisions.

However, other economists like KPMG chief economist Diane Swonk believe the Fed may still raise short-term interest rates before the year's end, despite growing political pressure to cut them.

Consumer inflation is expected to be 3.4% year-on-year in August, according to a forecast published by MarketWatch. This is slightly higher than the 3.3% figure reported in July but remains significantly above the Fed's longer-term 2% inflation target. Rising global energy prices, increased household expenditures, and higher business costs due to record-high diesel prices have all contributed to the inflationary pressure.

The situation weighs heavily on the Fed, which has generally lowered interest rates since 2024 to boost the economy. However, the last rate hike was in mid-2023, as inflation continued to climb following the Middle East war. The Fed has a 71.4% chance of raising rates by a quarter-point next week, according to CME Group's FedWatch tool. Several Fed policymakers have indicated they would consider raising rates if August's data does not show a continuing downward trend.

The inflation scare has escalated since the last Fed meeting in July, as the Iran war has stalled and oil prices have rebounded above $100 a barrel. The US is also facing a trade war with Canada, its second-largest trading partner. President Trump has pledged a $5,000 dividend to every American adult if Republicans retain both chambers of Congress in the upcoming midterm elections, a move aimed at addressing the affordability crisis that many Americans feel as a result of persistent inflation and the unpopular war with Iran.