US inflation accelerated once again in August, intensifying pressure on Federal Reserve Chair Kevin Warsh to raise interest rates at next week's monetary policy meeting. Following the latest data release, market bets on a September rate hike surged, with the probability jumping from roughly 70% on Thursday to above 85%, while some economists who had previously expected the Fed to hold steady have begun shifting their forecasts toward a rate increase.

The Labor Department reported Friday that the core consumer price index, which excludes food and energy costs, rose 0.3% in August from the prior month, exceeding expectations. With US inflation having remained elevated above normal levels for years, this report further reinforces the view among some Fed officials that higher rates are needed to curb price pressures. Omair Sharif, founder and president of Inflation Insights, said bluntly that the time has come for the Fed to prove its anti-inflation commitment through action rather than words.

According to federal funds futures, investors now see an 85% probability of a rate hike at the September 15–16 FOMC meeting, a notable jump from Thursday's approximately 70% level. Beyond that, markets are also pricing in the possibility of an additional increase by December.

Economists' expectations have shifted rapidly as well. Before the CPI release, the economics community was far less aggressive than financial markets in forecasting a September move; however, after the data came out, multiple institutions including TD Bank and JPMorgan revised their projections, now expecting the Fed to raise rates next week. Diane Swonk, chief economist at KPMG, said this inflation report further tilts the Fed's policy debate toward tightening. In her view, the question has evolved from "whether to hike" to "how much is needed to control inflation."

It is worth noting that the August core inflation increase was largely driven by a record surge in wireless communication service prices, which may carry some one-off elements. Nonetheless, numerous analysts believe that with inflation persistently high, the Fed can no longer rely solely on expectations of future price improvements to justify holding rates steady.

Warsh's Hawkish Stance Puts His Credibility on the Line

Beyond the latest inflation figures, Chair Warsh's own hawkish remarks have drawn added attention to next week's gathering. Speaking at Jackson Hole on August 28, Warsh stated that underlying US inflation has not shown meaningful improvement, and if incoming data fail to further demonstrate that inflation is moving back toward the Fed's 2% target, policymakers still have "work to do."

Sharif argued that after such a statement, it would be difficult for Warsh to refrain from supporting a rate hike at the next meeting. Bloomberg Economics economists Anna Wong and Andrew Sacher also noted that the signal from markets is unmistakable: investors want and expect the Federal Open Market Committee to raise rates. If the Fed ultimately holds, Warsh's credibility in the eyes of market participants could suffer.

In fact, momentum for tighter policy within the Fed had already been building. Despite keeping the benchmark rate unchanged at five consecutive meetings this year, three officials voted in favor of a 25-basis-point hike at the July session, and two non-voting officials indicated they would have supported an increase if they had a vote.

Economists at Evercore ISI, led by Krishna Guha, said Friday that a rate hike next week now appears highly likely. They believe that with oil prices adding further inflationary pressure, Warsh may view current data as insufficient to justify ignoring inflation risks, and that a hike would also help restore his previously dented policy credibility.

Soaring Oil Prices and Rising Inflation Expectations Strengthen the Case for Action

Another challenge confronting the Fed stems from the energy market. As the Iran conflict intensifies, international oil prices have surged again, with Brent crude reaching $109 per barrel on Thursday at one point. Meanwhile, structural factors driving price increases, such as data center construction, are unlikely to fade in the near term.

Consumer concerns about inflation are also clearly on the rise. The latest University of Michigan survey shows that US consumers' one-year inflation expectations jumped to 4.6% in early September from 4% last month; at the same time, for the first time since 2023, a majority of consumers now anticipate that interest rates will rise over the next 12 months.

The labor market has also shown no significant signs of deterioration that would force the Fed to remain cautious. Although wages do not currently appear to be a major driver of inflation, the unemployment rate remains low and is widely considered stable. Some Fed officials even believe that the current level of rates may be restraining demand less than previously estimated.

As a result, markets have begun debating whether the Fed needs to reverse the cumulative 75 basis points of rate cuts implemented last year in response to labor market slowdown risks. Joseph Brusuelas, chief economist at RSM US, even argues that the Fed should retract the three rate cuts delivered in late 2025 to cool down what may be significantly above-trend US economic growth.

However, if Warsh ultimately chooses to hike, it could also reignite political pressure from the White House. Former President Trump has repeatedly called for the Fed to lower rates and last week even threatened to halt trade with certain countries running trade deficits if the Fed does not cut. Larry Kudlow, director of the White House National Economic Council, said Friday that if the Fed takes "dramatic action," the president is expected to respond accordingly.