Fed rate-hike case builds as inflation fails to cool

By Ann Saphir

Sept 11 (Reuters) - Back-to-back hotter-than-expected inflation readings may ‌disappoint the majority of ​U.S. central bankers ​who had been counting on price pressures easing on their own, setting the table for an interest-rate hike at the Federal Reserve's meeting next week and potentially more to follow.

U.S. consumer price inflation excluding energy and food, a key measure of underlying ‌inflation, rose 0.3% last month from the previous month, the Bureau of Labor Statistics reported, more than the 0.2% that ⁠economists had anticipated. From a year earlier, core CPI rose 2.4%, while overall consumer inflation measured 3.4%.

Coupled with a stronger-than-expected August producer price index released on Thursday and oil prices that ‌have soared above $100 a barrel amid renewed ‌hostilities in the Middle East, the latest data suggest inflation by the Fed's targeted measure, above the target 2% for 5-1/2 years, is again moving in the wrong direction.

"Today’s clean 0.3% core CPI print, combined with the sharp rise in energy prices and persistent tensions with Iran, all ​but locks in a Fed rate hike next week," wrote Principal Asset Management chief global strategist Seema Shah. "After half a decade of above-target inflation, policymakers are likely to conclude that more than one hike will be needed to re-establish price stability."

The Fed has left its policy rate in the ⁠3.50%-3.75% range all year, including in a 9-3 vote in July that signaled rising sentiment inside the Fed that higher rates were already needed. Last month at the Kansas City Fed's annual gathering ​in Jackson Hole, Wyoming, Fed Chairman Kevin Warsh said he and his fellow central bankers may need to act if they don't have confidence that underlying inflation is moving toward 2% "clearly and at sufficient speed."

Economists Friday said the ​August data does not appear to meet that bar.

"For the Fed, it is time ‌to put up, or shut up," Inflation Insights founder Omair Sharif wrote. "You cannot give a speech like you did at Jackson Hole and not support a rate hike at the next meeting. You will either have to back up ⁠those words or end up as the boy who cried wolf."

Not all economists agree. The Fed targets 2% inflation by the 12-month change in the personal consumption expenditures price index, which weights some items, including some AI-related prices, more heavily than the CPI. Friday's CPI data showed software and accessories prices declined, and core goods prices decelerated. Pointing ⁠to those figures, Oxford Economics analysts estimate core PCE for August likely rose a "benign" 0.2%, allowing the Fed to skip a rate hike next week.

But, they added, the decision ​is on a "knife's edge."

Several other economists forecast a higher core PCE reading which they say would likely stoke concern among Warsh's colleagues who had expressed expectations that cooling inflation in June and July was the start of a welcome trend. At least two Wall Street firms now newly forecast a rate hike next week, having previously expected ‌a hold.

"This call reflects the inflation data, but also the market expectations as Chairman Warsh will want to avoid a dovish surprise next week," Piper Sandler analysts wrote.

Traders of short-term interest-rate futures are now pricing about an ‌85% chance of a quarter-point increase at the Fed's September 15-16 meeting, versus about 70% before the report. Market pricing points to expectations for a second rate hike in ⁠December.

"We don’t think today’s print portends a reacceleration of core ‌inflation, but merely a bump on the disinflationary ​road," wrote Natixis economist Christopher Hodge. "We think a nudge via a hike or two is probably what the Fed will think is appropriate, starting with a hike next week."

(Reporting by Ann Saphir, Michael S. Derby, Lucia Mutikani; Editing by Toby Chopra ‌and Chizu Nomiyama)

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