The Aug. 12 Inflation Report Could Decide Whether Kevin Warsh Raises Rates in September

For much of this year, investors have focused on when the Federal Reserve would finally begin easing monetary policy. That narrative has shifted. Rising oil prices, stubborn inflation, and Treasury yields hovering near their highest levels in almost 20 years have forced markets to reconsider whether the Fed’s next move might actually be another rate increase. 

The next major test comes on Aug. 12, when the U.S. Bureau of Labor Statistics releases July’s Consumer Price Index (CPI). If inflation surprises to the upside, it could strengthen the case for Federal Reserve chair Kevin Warsh to support a rate hike at September’s Federal Open Market Committee (FOMC) meeting.

Inflation Data Is About to Take Center Stage

According to a Financial Times report citing people familiar with Warsh’s thinking, the Fed chair remains open to raising interest rates in September if inflation data over the coming weeks runs hotter than expected and financial markets begin pricing in higher borrowing costs.

Granted, the report is based on unnamed sources rather than comments from Warsh himself, so investors should treat it cautiously. Even so, the economic backdrop makes the possibility difficult to dismiss.

Five major inflation reports will be released before policymakers gather for the Sept. 15-16 FOMC meeting. The Aug. 12 CPI report kicks off that stretch, but it won’t be the final word. Two additional reports arrive just days before the meeting, giving Fed officials one last opportunity to gauge whether inflation is accelerating or cooling before they vote.

Let’s start with CPI because it arrives first and often shapes market expectations for the other reports. A hotter-than-expected reading could quickly change how investors price the September meeting.

Oil Prices May Have Changed the Inflation Story

The biggest inflation risk isn’t difficult to identify. Oil prices surged during July after renewed fighting involving Iran disrupted energy markets. West Texas Intermediate crude climbed approximately 21% during the month while Brent crude gained about 24%.

Energy affects almost every part of the economy. Transportation costs rise. Manufacturers pay more to move raw materials. Airlines, trucking companies, and retailers eventually pass those higher expenses to consumers. Government inflation reports have repeatedly shown energy to be one of the largest contributors to inflation’s rebound this year.

Meanwhile, the bond market isn’t signaling confidence that inflation is fully under control. The 30-year Treasury yield remains near its highest level in almost two decades, suggesting investors continue demanding higher compensation for long-term inflation risk.

The Financial Times also noted that inflation swaps — a market-based measure the Fed reportedly monitors closely — currently imply inflation averaging about 2.4% over a five-year period beginning in 2031. That makes this measure different from short-term forecasts. Rather than reacting to temporary swings in gasoline prices or tariffs, it measures whether investors believe inflation will remain elevated over the longer run.

That expectation still sits above the Fed’s 2% target.

Key Takeaway

In short, Aug. 12 could become the most important economic date of the summer. If CPI comes in hot, followed by firm PPI and PCE readings later in the month, the odds of a September rate increase could rise quickly. Add in oil’s July rally and long-term Treasury yields near 20-year highs, and the case for tighter monetary policy becomes more compelling.

That said, investors shouldn’t treat the Financial Times report as confirmation that a rate hike is coming. The reporting relies on anonymous sources rather than direct comments from the Fed chair. Regardless, the inflation data will speak louder than anonymous sources. Smart investors should spend less time debating headlines and more time watching the government’s inflation reports over the next month, because those numbers — not speculation — are likely to determine whether September brings higher interest rates.

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