Soaring Cellular Broadband Costs Contributed Most To Core CPI As Traders Cement Bets For A September Hike

• U.S. consumer prices excluding food and energy climbed 0.3% in August, topping the consensus forecast of 0.2%. 
• A record 5.9% price surge in wireless phone plans added around 0.1 percentage point to the core inflation print.
• Financial markets now price in a nearly 90% likelihood of a quarter-point rate increase by the Federal Reserve next week.

Federal Reserve officials appear set to tighten monetary policy next week after fresh economic data revealed U.S. consumer inflation accelerated in August, driven by a rebound in energy prices and a sharp jump in cell phone service rates.

According to figures released on Friday by the Bureau of Labor Statistics, the Consumer Price Index (CPI) climbed 0.4% last month following a modest 0.1% gain in July. Year-over-year headline inflation remained elevated at 3.4%.

Core CPI, which strips out volatile food and energy costs, rose 0.3% month-over-month, exceeding the 0.2% advance economists expected. On an annual basis, core prices expanded 2.4%.

Cellular Price Shock Lifts Core CPI

An unusual catalyst contributed significantly to the core reading: a historic 5.9% single-month spike in wireless telephone services. The increase added roughly a tenth of a percentage point to the total monthly core inflation rate.

Analysts pointed to recent pricing and plan adjustments among major telecommunications providers, including AT&T Inc. (T) and T-Mobile US Inc. (TMUS), which phased out older discounted packages and instituted higher rate tiers over the summer.

While some economists characterized the wireless surge as a one-off shock that overstated underlying trends, market observers noted the central bank is unlikely to overlook the broader picture.

"While it is true that the wireless index added 10 basis points to core CPI today, I don't think the Fed will have the luxury of slicing and dicing the data at the meeting next week," noted Omair Sharif, president of Inflation Insights LLC.

Market Odds Shift Ahead of FOMC

After the inflation release, interest rate futures markets quickly recalibrated. Traders increased the probability of a 25-basis-point rate hike at the Fed’s policy gathering to about 88%, up from about 72% prior to the report.

Financial markets reacted with initial volatility before stabilizing. Treasury yields nudged higher as bond traders adjusted to a higher-for-longer policy path, while major Wall Street indexes managed modest gains as investors processed that the inflation report was largely in line with broader expectations.

Fed Facing Persistent Pressure

The central bank faces a delicate balancing act. While price growth has cooled dramatically from peak levels seen in previous years, headline numbers remain consistently above the Fed’s official 2% annual target.

Beyond telecom costs, broader energy price pressures continue to complicate the disinflationary journey. Multiple Wall Street brokerages updated their forecasts on Friday, now anticipating the Fed will deliver a rate hike next week and potentially signal further tightening before year-end if stubborn inflationary factors persist.

The Federal Reserve has maintained its benchmark interest rate within the 3.50%–3.75% corridor throughout the year. However, recent remarks from Fed Chair Kevin Warsh at the Jackson Hole symposium indicated that policymakers would act if underlying inflation failed to trend down toward the 2% target quickly enough. 

"Today's clean 0.3% core CPI print, combined with the sharp rise in energy prices and persistent tensions, all but locks in a Fed rate hike next week," Seema Shah, chief global strategist at Principal Asset Management, told Reuters. "After half a decade of above-target inflation, policymakers are likely to conclude that more than one hike will be needed to re-establish price stability." 

The iShares 20+ Year ETF (TLT) rose 0.3%.  Retail sentiment for the SPDR S&P 500 ETF (SPY), an exchange-traded fund that tracks the S&P 500 Index, has moved to ‘bearish’ from ‘neutral’, while Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 Index, has flipped to ‘bearish’ from ‘bullish.’ 

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