Inflation persisted in August, potentially locking in a Fed interest rate hike

Prices for a wide swath of goods and services continued to climb in August, according to a report Friday that raises the specter of a Federal Reserve interest rate hike next week.

The consumer price index rose a seasonally adjusted 0.4% for the month, putting the 12-month increase at 3.4%, the Bureau of Labor Statistics reported Friday. Both readings were in line with the Dow Jones consensus.

However, stripping out volatile food and energy prices, the core CPI posted a 0.3% monthly gain, or 0.1 percentage point higher than forecast. The core annual rate came in at 2.4%, matching the estimate.

The report is the final major inflation indicator the Fed will see before it holds its policy meeting next week, concluding Wednesday with a vote on its key interest rate.

Traders responded to the numbers by ramping up bets that the Federal Open Market Committee will increase its benchmark interest rate by a quarter percentage point. Odds for a hike jumped to nearly 90%, according to the CME Group's FedWatch tracker of fed funds futures prices.

"There's no guarantee that the Fed will hike next week, but it's hard to see how the central bank can justify leaving rates on hold," said Chris Zaccarelli, chief investment officer for Northlight Asset Management.

Stock market futures nonetheless surged as oil prices plunged in morning trade. Treasury yields were mixed, though the policy-sensitive 2-year note jumped 4.6 basis points to 4.594%. One basis point equals 0.01%.

Energy propelled the headline number higher, as gasoline prices jumped 3.9%, accounting for more than one-third of the index's gain. The energy index broadly rose 2.1% amid pressure from escalating tensions in the Middle East and was up 16.3% from a year ago. Gasoline rose 27.4% and fuel oil surged 52% on a 12-month basis.

Food prices edged 0.1% higher as food at home costs held flat. The food index accelerated 2.7% annually.

Another significant factor was a 0.3% climb in shelter costs, which had moderated over the prior two months. Transportation services saw a 0.5% increase. Used cars and trucks rose 0.4% and new vehicle prices were up 0.3%, part of what appeared to be broad-based gains for the index. Tariff-sensitive apparel prices were flat and motor vehicle insurance fell 0.8%.

Heading into the CPI release, markets already were pricing in a nearly 70% probability that the central bank would vote to increase its benchmark interest rate by a quarter percentage point.

However, there have been differing views on which way the rate-setting Federal Open Market Committee will tilt, with some speculating that the difference could come down to hundredths of a percentage point in the CPI reading.