Fed ‘will most likely hike’ rates after ‘surprise’ inflation data 

Expectations that the Federal Reserve will raise short-term interest rates next week continued to climb on Friday in reaction to newly released inflation data, leaving many economists to conclude that a rate hike is all but certain.

Core inflation delivers a 'real surprise': The Consumer Price Index increased 0.4% month-over-month in August and was up 3.4% annually, according to the U.S. Bureau of Labor Statistics — about in line with what forecasters had predicted. The increases were driven primarily by high energy prices, which remain elevated amid the ongoing U.S.-Iran war.

But core inflation, which subtracts the more volatile food and energy items, was up 0.3% in August — a tick higher than the 0.2% forecasters expected and above the 0.2% increase that occurred in July.

August's core inflation data brought a "real surprise" and "adds weight to a Federal Reserve rate hike next week," First American Senior Economist Sam Williamson wrote in a social media post.

Odds of a rate hike jump again: Many economists and market watchers have said for weeks now that they expect the Federal Open Market Committee (FOMC) to raise short-term interest rates at the central bank's Sept. 15-16 meeting.

While the CME Group's FedWatch tool placed the odds of a rate hike at around 60% near the start of this week, the odds jumped to 70% by Thursday after oil prices topped $100 a barrel, then leapt again after the latest inflation data was released, hitting 86.3% by midday Friday. The tool also placed the odds of a 25-basis-point increase and a 50-basis-point increase in October at 50.9% and 42%, respectively.

Will the FOMC remain divided? Though the Fed has held rates steady since implementing a trio of rate cuts in the second half of 2025, inflation has increasingly concerned many FOMC voting members, with three backing a rate hike at the central bank's July meeting.

While Fed Chair Kevin Warsh acknowledged that inflation has remained stubbornly elevated in a speech at the Jackson Hole Economic Symposium last month, there still appeared to be some division among Fed officials in early September, with Fed Gov. Michael Barr urging the central bank to "act decisively" to curb inflation while Fed Gov. Christopher Waller indicated a preference to keep rates the same.

Waller did, however, say in a Sept. 3 speech that he "would consider" backing "a small adjustment in our stance" if new inflation data "comes in hot."

Chen Zhao, Redfin's head of economics research, wrote in a Sept. 11 blog post that the Fed "will most likely hike" rates at next week's meeting, though "there is lingering uncertainty."

Still, "With three dissenters at the last meeting who supported hiking and Warsh's own hawkish Jackson Hole remarks, the rapid rise in oil prices these past two weeks and today's inflation data will probably get enough people over the line for the hike to materialize," Zhao added.

Such a move would likely have little immediate impact on mortgage rates, however, as the anticipated increase has been largely baked into existing rates.

Consumer sentiment plunges again: Rising inflation isn't just impacting consumers' wallets, it's also affecting their views on the health of the U.S. economy. Consumer sentiment dropped to 47.8% in September, down 7.5% month-over-month and down 13.2% year-over-year, according to the University of Michigan's monthly survey released on Sept. 11. Though it remained above the record low level reached earlier this year, the latest readings were the second-lowest in the survey's 70-plus-year history.

"With a resurgence in fuel prices and trade tensions, consumers anticipate greater pressures on their pocketbooks to come," said Joanne Hsu, director of the university's Surveys of Consumers. "Year-ahead expectations for both personal finances and business conditions plunged" as well, Hsu noted.