Recent US inflation data has crossed the threshold that would trigger Federal Reserve action, according to a research note from CICC. The firm anticipates the central bank will implement a 25-basis-point rate increase at its September 16 meeting, bringing the target range to 3.75%-4%.

The inflation report shows rising energy costs as a primary driver, with August energy prices climbing 2.1% month-over-month on a seasonally adjusted basis. Gasoline surged 3.9% and contributed over one-third of the total CPI increase, while fuel oil prices jumped 10.1%. Since early September, the Middle East geopolitical situation has shown no signs of easing, with WTI crude breaking through $100 per barrel, suggesting continued energy price pressure will appear in September CPI figures. By the first week of September, AAA average gasoline prices had reached $4.15 per gallon, the highest in three months, while diesel prices exceeded $6 per gallon for the first time in history.

Service inflation demonstrates strengthening stickiness, partly attributed to telecom operator price adjustments. Core services excluding housing (supercore) rose 0.5% month-over-month in August, the strongest gain since January. Wireless telephone services contributed nearly half of this increase at 5.9%, a sector sensitive to package deals and promotional arrangements. After carriers cut prices twice since late last year, they have recently reversed course, with AT&T raising monthly fees for some existing customers starting in August. Airfares climbed another 2.7% following July's 2.2% advance, while hotel prices turned positive at 2.7% after two months of declines, indicating robust demand for travel-related services.

Core goods inflation remained moderate, with prices rising just 0.1% month-over-month excluding energy and food, buoyed by new vehicle gains of 0.3% and used vehicle increases of 0.4%. However, AI-related inflationary pressures persist, as the data center construction boom continues to push prices higher. Computer software and accessories prices surged 25.4% year-over-year, an all-time high, while computers, peripherals, and smart home devices rose 8.4% annually, near record levels. The August CPI data offered no definitive signals of cooling, particularly when paired with the August PPI reading that also exceeded expectations, with multiple components feeding into core PCE calculations—including airfares, medical services, and legal services—running high. This suggests core PCE year-over-year growth may remain flat from July, indicating persistently sluggish disinflation progress.

Looking ahead to the FOMC meeting, CICC expects the Fed to raise rates based on the latest inflation figures. Fed Chair Warsh has already signaled at Jackson Hole that inflation remains too high and the central bank stands ready to act as conditions warrant. Governor Waller subsequently provided a clearer reaction function: if August CPI declined or held steady, no hike would be necessary, but a rebound would warrant action. CICC projects the Fed will lower its year-end unemployment forecast from 4.3% to 4.1%, raise its overall PCE projection from 3.6% to 3.8%, and lift core PCE from 3.3% to 3.4%. The dot plot should maintain the current-year policy rate projection at 3.8% but raise the 2027 forecast from 3.6% to 3.8% and the 2028 projection from 3.4% to 3.6%. These adjustments would signal that inflation fighting remains the Fed's top priority, with restrictive policy extending well into the future and rate cuts off the table until substantial progress is achieved.

A more hawkish risk scenario remains possible, with the dot plot potentially showing additional rate increases either this year or next. This outcome is supported by persistent AI investment enthusiasm, a rebounding manufacturing cycle, renewed labor market expansion, accommodative financing conditions, elevated oil prices, and inflation running far above policy targets. Should this materialize, markets could reprice a longer and more aggressive tightening cycle than currently expected.

For markets, the impending hike may not necessarily be unwelcome news—indeed, an absence of action would likely be more concerning. Following the August CPI release, market odds for next week's rate increase jumped to nearly 90%. The 2-year Treasury yield rose about 4 basis points while the 10-year held roughly flat, and the 30-year dipped 2 basis points, producing a flatter yield curve. US equities advanced with all three major indices gaining approximately 1%, while gold initially spiked before retreating to pre-CPI levels. This market response suggests investors welcome the Fed's forthcoming decision, recognizing that timely hikes maintaining central bank credibility represent the appropriate path toward stabilizing markets and re-anchoring inflation expectations.