The probability of the Federal Reserve raising interest rates at its upcoming meeting has significantly increased, climbing to 70% following reports of rising wholesale prices in August and oil prices crossing the $100 per barrel mark. Market participants are also considering the possibility of a second rate hike before the year ends, driven by persistent inflation concerns exacerbated by geopolitical tensions in the Middle East. This inflationary pressure, highlighted by the Producer Price Index (PPI) rise and crude oil’s surge, is prompting expectations of more aggressive monetary tightening.

The PPI increased by 0.4% in August, slightly surpassing forecasts and pushing the annual wholesale inflation rate to 5.4%. At the same time, heightened conflict in the Middle East has energized commodity traders, resulting in a 4% jump in U.S. crude prices. The European Central Bank has also reacted, raising interest rates by a quarter point and revising inflation forecasts higher due to the ongoing Iran conflict’s potential long-lasting impact on prices. These developments have made it difficult for the Fed to avoid a rate hike in the coming week.

Ahead of the Federal Reserve’s decision, policymakers will receive one final inflation data report when the consumer price index (CPI) is released, with consensus expecting a headline annual rate of 3.4% and a core rate of 2.4%. The Fed prioritizes the personal consumption expenditures (PCE) price index, which showed more elevated readings earlier in the year. Bank of America economists believe the core PCE inflation is on track for a monthly rate increase that supports the case for a rate hike next week, and there is speculation about multiple increases in the months ahead.

Market strategists emphasize that underlying inflation pressures extend beyond consumer prices, as supply chain inflation remains stubborn and difficult to pass directly to consumers. Even a modestly soft CPI reading could mask persistent inflation issues upstream. Overall, economic indicators and geopolitical risks are aligning to create a strong case for the Federal Reserve to tighten monetary policy further to combat inflation.