The latest inflation report and subsequent reaction from the markets say that Kevin Warsh is less than a week away from raising interest rates for the first time as Fed chair. The consumer price index rose a seasonally adjusted 0.4% in August and 3.4% over the previous 12 months, challenging the narrative from July’s data that inflation was cooling. Core CPI (which excludes volatile food and energy prices) is among the data the Fed scrutinizes for interest rate decisions. It jumped a higher-than-expected 0.3% for the month. That has traders pricing in a 90% chance of a quarter-point rate hike next week, per CME Group data. Major drivers of overall inflation included: - Energy: Gasoline prices climbed 3.9% over the previous month and 27.4% over the past year, fueled (sorry) largely by the war in Iran.
- Food: The food index inched up 0.1% for the month and increased 2.7% over the past 12 months.
- Electronics: While smartphone prices were down 12.2% year-over-year, computer software and accessory prices skyrocketed 25.4% over the past year, the largest annual price increase ever.
More market reactions: Treasury yields remained near multiyear highs yesterday. Will Warsh raise rates despite Trump’s desire for cuts?The stage is set for the Fed to raise rates for the first time in three years to steer inflation back toward its 2% annual goal, something it hasn’t achieved in five years, with investors mostly anticipating a quarter-point hike. It’s a political conundrum for the typically tight-lipped Warsh, who President Trump selected with an expectation that he would lower rates. But high prices are also a factor in the upcoming midterm elections. But there’s still a case for doing nothing: While the market is pricing in a rate hike as a near certainty, not everyone is convinced it’s needed. One expert told CNN a rate increase coupled with overwhelmingly high energy prices could actually slow the economy more than the “tap the brakes” the Fed intends.—DL | 
