Core Inflation Rose More Than Expected In August. Odds Of a Fed Rate Hike Are All But Certain.

Odds of a rate hike by the Federal Reserve jumped on Friday after core inflation rose more than expected last month.

Chances are all but certain now, with the CME Group's FedWatch tool showing they now stand at 91.6% compared to Thursday's 72.4%.

Core inflation climbed more than expected in August, rising 0.3%. The figure was 0.1 percentage points more elevated than forecasts. The annual rate clocked in at 2.4%, as the Dow Jones consensus expected.

The Bureau of Labor Statistics showed that the headline figure climbed 0.4% last month, in line with expectations. The year-on-year figure stood at 3.4%, also in line with expectations.

"Indexes that increased over the month include communication, lodging away from home, airline fares, education, and used cars and trucks. Conversely, the index for medical care and the index for motor vehicle insurance were among the major indexes that decreased in August," BLS added.

The report is the latest the Fed will see before announcing its policy decision next week.

In this context, a recent survey showed that almost a third of Americans expect their financial situation to get worse next year. Conducted by the New York Federal Reserve, the latest instance of the Survey of Consumer Expectations showed that respondents who expect their finance to get much or somewhat worse in the next year climbed 2.3 percentage points, clocking in at 32.6% compared to 30.3% last month.

Those claiming their financial situation was much or somewhat worse than a year ago climbed to 38.6%, compared to 37.6% in July.

Looking at inflation, median expectations were unchanged for the one-year- and five-year-ahead horizons, standing at 3.6% and 3%, respectively. For the three-year-horizon, the figure decreased by 0.1 percentage point, standing at 3.2%.

Households also expect their expenses to increase more than their income. The median expected growth in income remained unchanged at 3%, while spending growth expectations increased by 0.3 percentage points, standing at 5.2%.

The European Central Bank (ECB) also raised its interest rates on Thursday, noting that the war between the U.S. and Iran keeps putting pressure on prices.

The benchmark rate now stands at 2.5% compared to the previous 2.25%. The body noted in a statement that the decision "underscores the Governing Council's commitment to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term."

The body went on to say that its baseline projections now stand at 3% this year, 2.5% in 2027 and 2.1% in 2028. Core inflation, in turn, is set to be stickier: "the baseline foresees 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028. Compared with June, the baseline projection for inflation in 2026 is unchanged, while it has been revised up for 2027 and 2028," the document says.

The ECB warned that outlooks remain "highly uncertain, with risks to the upside for inflation and to the downside for economic growth."