Inflation heats up again. At this Fed meeting, is an interest rate hike on the table?

The spike in inflation reported last week probably wasn't welcomed by those hoping to buy a home or cut their monthly credit card payments.

That's because August's rise in the consumer price index to 3.7% from 3.2% didn't offer new hope that the Federal Reserve's policymaking committee will be cutting interest rates any time soon – possibly leaving mortgage rates at two-decade highs and average new credit card rates well above 20%.

The Fed is squarely focused on pushing inflation toward a 2% annual rate, and Federal Reserve Chair Jerome Powell affirmed that in August at the Fed’s annual conference in Jackson Hole, Wyoming.

"We are attentive to signs that the economy may not be cooling as expected," Powell said. “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further (rate increases).”

Will the Fed be announcing a rate increase today?

Even with the uptick in inflation, investors who trade based on interest rates have become even more confident that no rate increases will be announced follwing the meeting at 2 p.m. today, according to the CME FedWatch Tool.

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Among the many reasons, interest rate traders might be so confident that the Fed will hold the fed funds rate steady:

◾ Less hawkish Fed-speak: Powell has touted the Fed's success in driving down inflation from 40-year highs and said in August that the Fed will move "carefully" as they try to keep the U.S. economy from tipping into recession.

◾ August fuel prices: A one-month spike in gasoline prices contributed a large portion of the recent bump in inflation. Gas prices are actually down 3% from August 2022.

◾ The core cools: When energy, one of the inflation index's most volatile components, and food are removed, the index fell in August.

Fed meeting Live updates today:No interest rate hike expected in September

How inflation and core inflation differ

It's an imperfect analogy, but say the surface of the sun represents the prices we pay for food and energy. Like solar flares, both can spike intermittently. Food prices rose just 0.2% from July, but gasoline prices jumped 10.6% last month and helped push overall annual inflation up a few points to 3.7%.

And because both touch nearly all businesses and their costs, if energy or food prices stay overheated, they can seep into prices we pay for everything else.

How much food and energy prices contribute to index

Core consumer price index report and U.S. inflation problems

It’s not food and energy prices, though, that threaten to keep prices elevated throughout the economy. It's everything else, or what economists call core inflation. More specifically, Powell has worried that the prices of services we buy are still rising too fast – more than double the Fed's 2% target.

"We would want core inflation to be coming down because that’s what we think: Core is signaling where (overall inflation) is going to go in the future," Powell told reporters after the Fed's July policymaking meeting.

How our economy became overheated

It might be easier to list what didn't contribute to the worst inflation in four decades, but if we just look at a couple of snapshots of things we buy and which items were the biggest drivers, it started in March 2021 with energy, which represented about half of the month's rise in inflation.

What we are buying that's driving core inflation higher

If it's not eggs or gasoline, what do we continue paying more for? In August, our homes and transportation broadly categorized under the services sector outpaced other categories. Dining out, under the food category but with a significant service component, also remained higher than the overall consumer price index. Some specifics:

◾ Car insurance: up 19%

◾ Car repair: up 17%

◾ Laundry and dry cleaning services: up 14.5%

◾ Pet food: up 8.7%, which continues a trend from earlier this year.

◾ Food away from home: up 6.5%

A cooling core could bring down borrowing costs

The higher interest rates that helped slow inflation have made savers happy (CD rates are the highest they've been in years), but borrowers aren't as enthusiastic with 30-year mortgage rates at two-decade highs.

Who is happier in months to come will likely rest on how satisfied Powell and other members of the Fed's policymaking committee are that inflation is cooling.

"There’s reason to think (core inflation) can come down now," Powell said in July. "But it’s still quite elevated, and so we think we need to stay on task ... hold policy at a restrictive level for some time. And we need to be prepared to raise further if that – if we think that’s appropriate."

Interest rate traders, though, are even betting that the Fed will be in the process of cutting rates by this time next year, according to the CME FedWatch Tool.

Increases in credit card, mortgage and auto loan rates

Carrying debt on a credit card gets more expensive

As the prime rate has risen to 8.5%, the average credit card interest rate has risen from 14.6% in February 2022 to 24.4% this month, according to LendingTree. That's raised monthly interest charges to $140 – about a $55 increase – on the average American's $6,965 credit card balance. 

Mortgage rates make home buying more expensive

As Powell continues to say, we shouldn't expect a reduction in interest rates soon, which could continue the housing market's troubling direction.

Home sales were driven down by higher mortgage rates in 2022. Average 30-year mortgage rates have risen incrementally since March, hitting 7.6% on Sept. 11.  That has left new homeowners facing much steeper mortgage costs than they did before March 2021 and has made others hesitate about buying or selling.

Contributing: Paul Davidson