Inflation expected to tick higher in August as oil prices surge

On Wednesday, investors will watch closely for one of the most important data points the Federal Reserve will consider in its next interest rate decision: August's Consumer Price Index (CPI).

The report, set for release at 8:30 a.m. ET is expected to show headline inflation of 3.6%, an acceleration from July's 3.2% annual gain in prices, according to estimates from Bloomberg. Over the prior month, consumer prices are expected to have risen 0.6% in August, a faster clip than July's 0.2% monthly increase.

A significant rise in energy prices is expected to drive the bulk of those increases. Oil prices hit new year-to-date highs on Tuesday with West Texas Intermediate (CL=F) closing just below $89 per barrel. Brent crude futures (BZ=F) sat above $92 per barrel — the highest levels in oil prices since November 2022.

On a "core" basis, which strips out the more volatile costs of food and gas, prices in August are expected to have risen 4.3% over last year — a slowdown from the 4.7% annual increase seen in July, according to Bloomberg data. Monthly core prices are expected to have climbed 0.2%, matching July's monthly rise. Within core, used car prices are expected to have fallen further last month, after dropping 1.3% month-over-month in July and 0.5% in June.

Bank of America expects additional declines in other categories of core goods, including household furnishings, recreation commodities, education, and communication commodities given the ongoing improvement in supply chains.

Still, the bank expects food prices to rise for a second consecutive month while shelter inflation is also expected to remain high.

"Over time, we do expect shelter inflation to take another step down given that asking rent inflation measures continue to register unseasonably soft rent increases," Bank of America economist Michael Gapen wrote in a note ahead of the report. "This alone should help keep a lid on inflation over the coming months."

Inflation has remained significantly above the Federal Reserve's 2% target. That, along with the upward pressure in oil and a labor market that, while softening, is still tight, suggests the Federal Reserve will continue to raise interest rates later this year.

But prior to the report, markets were still expecting the central bank to pause its hikes at its meeting later this month. As of Tuesday afternoon, markets were pricing in a roughly 93% chance the Federal Reserve keeps rates unchanged at its Sept. 20 policy meeting, according to data from the CME Group.