Core CPI Exceeds Expectations, Fed's First Rate Hike in Three Years Is Just Awaiting Official Announcement—Why Are US Stocks Rising Instead of Falling?

According to Zhitong Finance APP, the U.S. August CPI has added further tension to the already highly anticipated Federal Reserve meeting in September. While the overall inflation data met expectations, the core CPI month-on-month re-accelerated and exceeded market expectations. Coupled with previous strong PPI and employment data, the odds of the Federal Reserve raising interest rates by 25 basis points next week have rapidly increased. According to the CME FedWatch tool, before the release of the CPI, the market was pricing in about a 70% probability of a rate hike in September; after the data was released, this probability approached 90% at one point. If the Federal Reserve acts next week, it will be the first rate hike in three years.

However, it's worth noting the market reaction: Treasury yields rose, but U.S. stock index futures did not fall as intuition might suggest—instead, all three major U.S. equity indices rose by more than 1%. Behind this, the market seems to be trading not just on the CPI itself, but on a repricing among inflation, interest rates, oil prices, geopolitical risk, and tech stock earnings.

Core CPI Runs Hot: Gasoline, Housing, and Transport Services All Up

Data released by the U.S. Bureau of Labor Statistics on Friday showed that CPI rose 0.4% month-on-month in August, up from a slight 0.1% increase in July; year-on-year it rose 3.4%, unchanged from July, both in line with market expectations. Excluding food and energy, core CPI rose 0.3% month-on-month, above the expected 0.2%, and faster than July’s 0.2%; core CPI rose 2.4% year-on-year, slightly down from July’s 2.5%.

This report indicates that, against a backdrop of ongoing pressure from the Iran conflict, tariffs, and data center construction, U.S. inflation has made almost no progress toward the Federal Reserve’s 2% target.

Breaking it down: gasoline prices rose 3.9%, accounting for more than a third of the index’s increase. The overall energy index rose 2.1%, up 16.3% year-on-year, due to heightened tensions in the Middle East. Food prices rose slightly by 0.1%; household food costs were flat; the food index rose 2.7% year-on-year. Another key factor was housing costs, up 0.3%, after slowing in the previous two months. Transportation service prices rose 0.5%. Used car and truck prices rose 0.4%, new car prices were up 0.3%—all contributing to the broad index increase.

It’s worth noting the Federal Reserve tracks the Personal Consumption Expenditures (PCE) price index, not the CPI. Although core CPI year-on-year edged down to 2.4%, core PCE for July was still 3.3% year-on-year, well above the Fed’s 2% target.

PPI and Job Gains Resonate; Core PCE Estimates Move Higher

PPI data released Thursday also showed persistent inflationary pressure. The August PPI rose, with several key sub-indexes—feeding into PCE inflation—posting strong results. Together with last week’s robust August employment report, expectations for a rate hike next week received further support.

Following the PPI data release, economists projected core PCE’s month-on-month increase in August between 0.15% and 0.28% (July: +0.2%); year-on-year, estimates ranged from 3.2% to 3.3% (July: 3.3%). In addition, the August PCE report will include some methodological adjustments, which some economists believe could shave a few basis points off the core inflation rate.

Additionally, several economists believe that import tariffs—especially those recently imposed on Canada—are keeping price pressures elevated. Dissatisfaction with high gasoline and food prices has led to a clear decline in U.S. President Trump’s approval rating and could cause Republicans to lose control of Congress in the November midterm elections.

For now, there are still internal divisions within the Federal Reserve regarding next steps. The Fed has left rates unchanged in its past five meetings, but at the July meeting, three officials dissented in favor of a 25 basis point hike.

Fed Chair Waller has been reluctant to state a preference, but said last month that if the Fed cannot be "confident underlying inflation is heading clearly and quickly enough towards target," there is still "work to do." Fed Governor Waller said at an event last week that if data confirmed inflation pressures were cooling, he would favor holding rates steady. Those remarks briefly brought down the odds of a hike. However, after the latest CPI data, futures markets showed investors believe a rate hike next week is almost a foregone conclusion and expect there’s a strong chance of another hike before year-end.

At the same time, Trump continues to pressure the Federal Reserve to cut rates, posting last week on social media: “Cut rates or I will stop trading with countries with which we have trade deficits.” Economists attribute the surge in long-term Treasury yields to this kind of political intimidation, and some expect the Fed could opt for tightening on Wednesday to underscore its independence.

Nationwide Chief Economist Kathy Bostjancic commented: “The signal from Chair Waller and others is that rates can only remain steady if disinflation persists, and today’s August report does not provide those conditions. Additionally, another rise in crude oil, gasoline, and diesel prices raises concerns that energy price gains could pass through into other goods, services, and inflation expectations.” The institution currently expects the Federal Reserve to raise rates by 25 basis points next week.

Why Did U.S. Equities Rally Instead of Fall? Markets Are Pricing In a Triple Logic

Despite rising rate hike expectations and continued Treasury yield increases following the CPI release, U.S. equity futures moved even higher.

On the surface, “inflation overshoots, hike odds rise” should be bearish for stocks. But today’s market dynamic is more complex.

First, this CPI report is not out of control. Overall CPI month-on-month and year-on-year numbers met expectations, as did core CPI year-on-year; only core CPI month-on-month was noticeably above expectations. Thus, the market did not receive an “inflation is out of control” signal sufficient to change the course of monetary policy dramatically. In other words, an increase in hike expectations is bearish, but this has already been partially priced in ahead of time.

Bank of America senior economist Stephen Juneau commented after the CPI release: “This report actually doesn’t make us more concerned about the inflation outlook,” though it will prompt the Fed to raise rates next week.

Second, falling oil prices are another key theme for equities. Over the past few days, oil prices surged past $100/barrel, which suppressed U.S. equity risk appetite. Brent crude futures jumped more than 6% on Thursday, stoking concerns energy costs would feed further into inflation and corporate expenses and force the Fed to remain hawkish for longer. But on Friday, oil prices fell sharply. Brent crude, which approached $110/barrel, retreated after reports Middle Eastern nations were trying to reach a temporary agreement with Iran on Hormuz Strait shipping arrangements. In latest trading, both Brent and WTI dropped over 3%.

This is an important positive for U.S. equities. Because the market’s real concern is not just whether the Fed will hike 25 basis points next week, but: Middle East conflict escalation → continued oil price rise → reignited inflation → the Fed forced to keep hiking → Treasury yields keep rising → stock valuations come under pressure. Today’s clear drop in oil prices means this risk chain has eased to a certain degree. Thus, the market has an interesting hedge: while a hot CPI increases hike odds, lower oil prices reduce the risk of worsening future inflation.

Third, tech stocks have their own independent positive driver. Oracle (ORCL.US) posted strong results and guidance, sending its shares sharply higher premarket and bolstering Nasdaq futures. Market data shows Nasdaq 100 futures outpacing S&P 500 and Dow futures. This indicates the equity rally is not only about interest rates—AI investment, cloud computing, and enterprise software demand remain distinct profit drivers for tech stocks. As long as earnings outlooks remain strong, they can offset some of the valuation pressure from higher rates.

Previously, the market had suffered for days under rising oil prices, climbing PPI, and Treasury yields. On Thursday, U.S. August PPI rose 5.4% year-on-year, oil prices surged over 6%, pushing Treasury yields even higher, and all three major U.S. equity indices posted four consecutive days of declines. In other words, prior to the CPI report, the market had already priced in “hot inflation + a more hawkish Fed.”

Therefore, when the final CPI was only slightly above expectations for core month-on-month—and not a broad-based major surprise—there was no need for another large-scale selloff.

From a trading perspective, this is closer to “the worst-case scenario did not get any worse.” It can even be interpreted as the market shifting focus from “Will the Fed hike?” to “How many more hikes after this one?” If the September hike is all but certain, the real issue will be whether more hikes are coming in October, December, and what the rate path looks like for 2027.

The Real Risk Still Lies in a “Second Shock” of Oil Prices and Inflation

However, the rise in U.S. equity futures does not mean inflation risks have been eliminated. In fact, the biggest market variable right now remains oil prices.

In the U.S. August CPI, gasoline prices rebounded after two months of declines; meanwhile, Thursday’s PPI also showed energy prices rising and feeding into the production side. If oil prices again break through $110 and keep climbing, today’s optimistic market take on the CPI could quickly reverse.

Particular caution is warranted if oil price rises are not short-term shocks, but persist due to supply disruptions in the Strait of Hormuz—then inflation could rise further, real consumer incomes could be squeezed, and the Fed could be forced to maintain higher rates. This would combine to form the worst outcome for U.S. equities: high oil prices + sustained high inflation + the Fed keeps hiking + Treasury yields rise.

Conversely, if Middle East tensions ease on the margins and oil prices continue to fall from over $100, then even if the Fed hikes by 25 basis points in September, the market may view it as a “fully priced-in hike” rather than the start of a new tightening cycle.

In sum, the real meaning of today’s rise in equity futures is not that this CPI is very positive, but that it is only mildly hawkish, not bad enough to break the recent trading framework; meanwhile, lower oil prices and diminished geopolitical risk are giving risk assets new breathing room.

Going forward, U.S. stocks should focus not only on whether there is a rate hike in September, but also on whether oil prices can keep falling and if the Federal Reserve will hike again beyond September. These two factors could determine whether the current rebound in U.S. equities is just a post-selloff correction or a full return to an upward trend.