The Federal Reserve is increasingly expected to raise interest rates at its upcoming meeting next week, with the probability rising to 70% amid mounting inflation concerns. This shift in outlook comes after a report revealed a 0.4% increase in the producer price index (PPI) for August, signaling rising wholesale costs, combined with a surge in U.S. crude oil prices above $100 per barrel influenced by continuing geopolitical tensions in the Middle East. Market expectations also suggest nearly a 60% chance of an additional rate hike before the end of the year as inflation pressures remain persistent.

The recent PPI data showed inflationary pressures are intensifying throughout the supply chain, a sentiment echoed by economists who highlight that rising oil prices and low unemployment make a rate hike more likely. The ongoing conflict involving Iran has contributed to commodity price spikes, exacerbating inflation worries and prompting central banks like the European Central Bank to raise rates and revise inflation forecasts upward. Experts like Jeffrey Roach from LPL Financial and David Russell of TradeStation underline how these developments have entrenched inflation concerns and influenced market behavior.

Ahead of the Fed’s decision, policymakers will analyze the upcoming Consumer Price Index (CPI) report due Friday, which is expected to show a headline inflation rate of 3.4% annually and a core rate of 2.4%. However, the Fed places primary emphasis on the personal consumption expenditures (PCE) price index, which showed higher inflation figures in July. This focus suggests the Fed may lean toward a more aggressive stance if inflation data continues to indicate persistent upward pressure, supporting expectations for at least one rate hike next week.

Some economists, including Bank of America’s Stephen Juneau, predict that core PCE inflation is running at a pace consistent with another rate increase, while others caution that even a soft CPI reading might not capture inflation challenges fully due to supply chain effects. These mixed signals have led to a growing consensus that the Fed may need to act firmly to contain inflation risks, signaling a potentially more hawkish monetary policy environment in the months ahead.