Can raising interest rates tame US inflation? The CPI report sets the tone for the Federal Reserve's decision next week, but tariffs, oil prices, and AI investment may cast doubt on policy effectiveness.

According to Zhitong Finance APP, Federal Reserve officials have previously signaled that they are prepared to raise interest rates if inflation does not show improvement soon. However, some analysts believe that, in retrospect, they may find that the effectiveness of this core policy tool is quite limited given the multiple factors currently driving up prices.

The Consumer Price Index (CPI) report to be released on Friday will determine whether policymakers will raise rates next week. Officials have emphasized the need for solid evidence that underlying inflation is moving back toward the Fed’s 2% target. According to futures contracts, investors currently estimate a roughly 60% chance that the Fed will hike rates at the September 15–16 meeting.

"The key drivers of inflation above trend are the Iran war, tariffs, and the chip shortage. Even if the Fed hikes rates once or twice, it is unlikely to fundamentally change this backdrop," said Wolfe Research Chief Economist Stephanie Roth.

The two main factors driving inflation this year—tariffs and energy prices—are often particularly insensitive to interest rates. The third factor, artificial intelligence (AI) infrastructure construction, also appears to be largely unaffected by interest rates, given the tens of billions of dollars invested in this area. Meanwhile, concerns over persistently high inflation and soaring government debt have already pushed up borrowing costs for U.S. households.

According to the median forecast in a survey of economists, the August CPI report is expected to show overall inflation rising 0.4% month-over-month and core inflation up 0.2% month-over-month.

Before the data release, signals from Federal Reserve officials have been conflicting, with some advocating that it is time to raise rates and others believing that price pressures are easing.

The following summarizes the causes of this round of inflation and analyzes how rate hikes might impact the overall economy.

Supply Shocks

Central banks typically raise interest rates to increase borrowing costs, reduce aggregate demand, and curb inflation. But rate hikes are not suitable for addressing the series of supply shocks that have recently pushed up prices and reignited inflationary pressures.

The Iran war that broke out in February pushed global oil prices above $100 per barrel, raising fuel costs and driving overall inflation higher. Elevated energy prices are one reason why August’s overall CPI is expected to rebound from the previous month.

Trade policy has created another shock by increasing the cost of foreign goods and constricting their supply. In April 2025, U.S. President Trump announced comprehensive tariffs as part of a series of moves to set up trade barriers. These measures have continued to evolve amid a series of court challenges and ongoing negotiations with other countries.

Many Fed officials believe the worst phase of the tariff impact has passed, but they remain vigilant for evidence that price pressures are becoming more widespread—should this occur, it could increase the necessity of rate hikes.

“Current evidence suggests that the effect of tariffs on prices has already largely passed into inflation, and the scenario I was previously concerned about—inflation in energy prices filtering through to many goods and services—has not materialized, at least so far,” said Federal Reserve Board Governor Christopher Waller.

Artificial Intelligence and Construction

High interest rates are weighing down the housing market, but have had virtually no dampening effect on the rush for demand in data centers and key components.

Since September 2024, residential construction employment has been on a downward trend, as high rates and home prices have hit sales. But overall construction employment hit a record in August, driven by a rebound in nonresidential professional hiring and engineering construction—a trend that may reflect the impact of AI.

J.P. Morgan stated that data center capital investment announcements have continued to surge, with related investment expected to reach $5.5 trillion by 2030.

Barclays economists noted that this AI “cushion” is making the Fed’s job more complicated, as it is blocking a traditional monetary policy channel: housing slowdowns leading to construction layoffs, with knock-on effects throughout the economy. Back in 2022, as the Fed raised rates, home sales plunged. Since then, sales have hovered at low levels.

“The economy is much less sensitive to interest rates than in past cycles,” said Ajay Rajadhyaksha, Head of Global Research at Barclays.

Barclays analysis finds that hyperscale cloud service providers spend more than 90% of their operating cash flow on AI infrastructure. “They are unlikely to reconsider their spending plans just because data center financing costs have risen by 50 to 75 basis points,” Rajadhyaksha and Barclays Chief US Economist Marc Giannoni wrote in a report.

Consumer Spending and Borrowing

Given that many recent inflation drivers are likely to be little affected by rate hikes, Federal Reserve officials may have to exert greater pressure on a sector of the economy more directly impacted by rising borrowing costs: consumers.

Even before the Fed has raised rates, U.S. households are already feeling the pressure as markets have spontaneously pushed up borrowing costs. On Wednesday, the 10-year U.S. Treasury yield rose to its highest level since 2023. Meanwhile, mortgage rates last week hit the highest point in over a year.

Natixis Chief US Economist Christopher Hodge said that as real incomes stagnate, rate hikes may “create downward pressure on discretionary spending, thereby slightly slowing growth.”

To be clear, the Fed also shoulders a dual mandate to stabilize employment and control inflation. Hodge said that with unemployment rates still low, officials face pressure to act on inflation—but making the right call is not easy.

“The pressure is on the inflation data side to show compelling performance,” he said. “Unless there is a renewed, clear indication that progress is being made on inflation, any sign short of that will likely prompt a rate hike next week.”