Prediction markets now price a 63 percent probability of a September Federal Reserve rate hike, up from 54 percent before the August jobs report. The shift follows the Producer Price Index report showing producer prices at 5.4 percent annually, with a monthly increase of 0.4 percent—up from 0.1 percent in July.
The annual PPI accelerated from 4.8 percent in July, driven largely by energy prices, which surged 4.2 percent during August. Core wholesale inflation remains elevated despite the monthly gain matching economist expectations.
The Fed faces a narrow policy path with inflation still above its 2 percent target. An August jobs report showing 162,000 new positions gives policymakers less concern about economic weakening, but persistent price pressures keep a hike in play. Oil prices have climbed due to renewed Middle East tensions.
Friday's Consumer Price Index report will be the decisive data point. Economists surveyed anticipate headline CPI to increase 0.4 percent in August and core CPI to rise 0.2 percent month-over-month, projecting annual headline inflation around 3.4 percent and annual core inflation near 2.4 percent.
A core CPI reading of 0.3 percent or higher would strengthen the case for a September hike. A cooler 0.2 percent print would likely keep rates unchanged and support equity markets.
For bond investors, duration risk has become acute. A Fed hike would accelerate yield curve flattening as short-term rates adjust to policy tightening while longer-term yields already price in future economic deceleration. In a higher-for-longer rate environment, credit spreads in investment-grade and high-yield corporate bonds face compression despite strong employment data supporting lower default risk.
