US inflation holds at 3.4% as Fed hike odds jump

US consumer inflation held at 3.4% year on year in August, government figures showed Friday, strengthening expectations that the Federal Reserve could raise interest rates at its meeting next week.

The consumer price index rose 0.4% from July, according to the US Bureau of Labor Statistics. Inflation remained above the Fed's long-term 2% target. Core inflation, which excludes volatile food and fuel prices, rose 2.4% year on year.

Fuel price increases accounted for one-third of the monthly rise in consumer prices. AAA motor club data said gasoline prices were up 44% since the start of the Iran war in February. Diesel prices reached $6 per gallon in the United States on Friday, adding pressure to transport, farming and construction costs.

CME's FedWatch tool put the probability of a 25-basis-point rate increase next week at 87% after the CPI reading. Several Fed policymakers had indicated before the release that they would be prepared to raise rates if August inflation did not show a slowdown.

Kathy Bostjancic, chief economist at Nationwide, said higher oil, gasoline and diesel prices raised concern that energy costs could spread to other goods and services and affect inflation expectations.

The Fed has held rates this year in a range between 3.50% and 3.75% after gradually lowering them since 2024. Its last rate increase was three years ago.

A rate increase would deepen a dispute with President Donald Trump, who has demanded lower interest rates to support economic activity. Trump has launched a criminal probe against former Fed chair Jerome Powell, is trying to fire another Fed governor and last week threatened to cut trade ties with certain countries if the Fed raised rates.

High prices remain a political issue before November's midterm elections. Democratic Senator Elizabeth Warren criticised Trump after the latest figures, saying Americans continued to pay more for housing, airline fares and childcare while wages had failed to keep up with inflation for five consecutive months.

The University of Michigan's consumer sentiment gauge was near an all-time low on Friday. Survey director Joanne Hsu said consumers expected greater pressure on their budgets from higher fuel prices and trade tensions.