US Inflation Just Repriced the Fed: What CPI and PPI Mean for Gold, the Dollar and Next Week’s FOMC

There was one question hanging over markets all week. Last Friday’s strong jobs report had put a September Federal Reserve hike back on the table, but employment was never going to finish the argument. That job was always going to fall to inflation.

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August producer prices rose 0.4% on the month and 5.4% from a year earlier. Then consumer prices rose 0.4% in August, leaving annual CPI at 3.4%. Core CPI came in at 0.3% for the month, slightly hotter than expected, although the annual core rate eased to 2.4%.

None of those numbers scream runaway inflation, and that isn’t the point. What they have done is remove another reason for the Federal Reserve to sit on its hands. By Friday afternoon a 25 basis point hike next Wednesday had stopped being a debate and become the clear base case, with CME FedWatch pricing close to 90% against roughly 70% the day before.

That is a huge repricing in a very short period, and a hike next week would be the Fed’s first since July 2023. And yet some of the cross-asset reaction is still refusing to behave as cleanly as you might expect. That is where this gets interesting.

The quick answer

Combined with resilient employment and elevated energy costs, the data significantly strengthened the case for the Federal Reserve to raise rates at its 15 and 16 September meeting. The market now broadly treats a quarter point hike as the base case.

But that does not automatically mean a stronger dollar, lower gold and weaker equities. We still need to see what the rate decision changes in yields and in global capital flows. That is the trade.

Go back one week and look at how much changed

At the end of last week, August payrolls had already changed the conversation. Nonfarm payrolls rose by 162,000, unemployment held at 4.1%, average hourly earnings increased 0.3%, and June and July were revised up by a combined 55,000, according to the August Employment Situation report from the US Bureau of Labor Statistics.

The conclusion I wrote at the time was deliberately specific. NFP did not tell us the Fed had to hike. It told us the labour market had given the Fed room to hike if inflation required it, and that was the entire setup for this week.

In the previous KenMacro Week Ahead, September hike pricing was sitting around 60% after payrolls. The US 2-year yield had closed at 4.37%, gold had finished around $4,430 and the dollar index was at 99.16.

Seven days later the 2-year has traded as high as 4.66%, the 10-year has touched 4.99% and the probability of a September hike is close to 90%. That is what repricing actually looks like. The economy did not transform in seven days, but the market’s belief about the policy response did, and that distinction is everything.

PPI was hot, but the composition mattered more than the headline

Thursday’s Producer Price Index gave the market its first proper warning. Headline final demand PPI rose 0.4% in August and 5.4% over the year, according to the August Producer Price Index release from the US Bureau of Labor Statistics. The useful part was underneath it.

Final demand goods rose 1.1% while final demand services edged up only 0.1%. The BLS attributed more than three quarters of the rise in goods to energy, where prices jumped 4.2%, and diesel fuel alone surged 24.1% in a single month. That is a very different inflation story from every part of the economy suddenly accelerating together.

Producer inflation excluding food, energy and trade services rose 0.3% on the month and 4.7% over the year. There is also a detail in there that deserves more attention than it got. Transportation and warehousing prices rose 2.3%, while trade services, which track the margins earned by wholesalers and retailers, fell 0.2%. The cost of moving goods jumped and the businesses selling them earned less for doing it, which tells you some of the energy shock is being absorbed rather than passed on, for now.

So the right conclusion was never “PPI is hot, therefore inflation is out of control”. It was that energy is creating enormous upstream pressure, and the question had become how far that pressure is spreading. Friday’s CPI went a long way towards answering it.

CPI gave the Fed a bigger problem

Headline CPI rose 0.4% in August, according to the August Consumer Price Index release from the US Bureau of Labor Statistics. Gasoline rose 3.9% on the month and accounted for more than a third of the increase, which was not particularly surprising given what had already happened across energy markets. The energy index is now 16.3% higher than a year ago.

The more important number was core. Core CPI rose 0.3% month on month against expectations for 0.2%, while the annual core rate actually eased from 2.5% to 2.4%. That combination needs reading properly, because the annual trend is still moving in the right direction while the latest monthly pulse was firmer. It makes it much harder for policymakers to declare victory.

Look at where some of that pulse came from. Airline fares rose 2.7% in the month and are 23.4% higher than a year ago, which is jet fuel showing up inside a measure that supposedly strips energy out. Shelter rose 0.3% after two softer months. If you want the longer run of these numbers, the desk keeps them on its US CPI inflation data page.

All of this is happening with the Fed funds target at 3.50% to 3.75%, where it has sat all year. The Committee’s own July policy statement from the Federal Reserve said inflation “remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy.”

There is another detail people keep overlooking. The July hold was not unanimous. It passed 9-3, and Beth Hammack, Neel Kashkari and Lorie Logan already wanted a 25 basis point hike then.

That was before this week’s inflation data, before Brent pushed back above $100 and before the 10-year went looking for 5%. So when people ask why September hike pricing has moved so aggressively, that is the backdrop. The hawkish case did not suddenly appear on Friday. It was already sitting inside the Committee, and this week’s data strengthened it.

The Fed trade has gone from “could hike” to “why wouldn’t they?”

That does not make a September hike guaranteed, because markets price probabilities, not certainties. But the burden of proof has changed. A week ago the Fed needed a reason to hike, and next Wednesday it may need a reason not to.

The current range is 3.50% to 3.75%, and a normal 25 basis point increase would take it to 3.75% to 4.00%. If the Fed instead holds while the market walks into the meeting pricing a hike near 90%, the hold itself becomes a powerful piece of information.

Why did they refuse? Was the Committee more worried about growth than it has let on, or did officials decide the energy shock would burn itself out? Were they simply unwilling to tighten into a supply shock, or had something in financial conditions started to bother them? At that point the surprise would no longer be the hike. It would be the hold, which tells you how much this week changed.

The 2-year Treasury is telling you the Fed trade is real

If you trade macro and you are not watching the US 2-year yield next week, you are missing half the market. After CPI the 2-year traded as high as 4.66% and was sitting around 4.62% late in the London afternoon. On the US Treasury’s daily par yield curve, Thursday’s 4.56% close was already the highest since July 2024.

That makes sense. The front end is where expectations for monetary policy are expressed most directly, so when the market raised the probability of a near-term hike, the 2-year responded. Clean. The desk tracks it daily on the US 2-year Treasury yield page.

Further along the curve, things are getting much more complicated. The 10-year touched 4.99% on Friday, and Thursday’s 4.95% close was the highest on the Treasury’s curve since October 2023. That cannot simply be put down to the Fed possibly hiking. Ten and thirty-year yields carry far more than the next FOMC decision: expectations for future inflation and nominal growth, government borrowing and Treasury supply, and the term premium investors demand for locking money away for a decade or longer.

That is why I keep telling people not to just ask whether yields are rising. Ask which yield, and why. A 2-year rising because the market expects a Fed hike is one trade. A 30-year rising because investors want more compensation for inflation and fiscal risk can become something completely different. Same bond market, different message.

Five percent on the 10-year is bigger than a line on a chart

There is something psychological about 5%, but this goes well beyond psychology. If investors can earn around 5% lending money to the United States government for ten years, every other asset has to compete with that. Stocks have to justify their valuations, companies refinancing debt face a higher cost of capital, mortgages stay expensive and private credit has to price risk differently.

Governments pay considerably more to roll their debt. And gold has to compete against an asset that actually pays you to hold it, which is why a sustained 5% 10-year is such a big deal.

Again, though, how we get there is the whole question. If the economy is booming and real yields are rising because the Fed has to keep policy restrictive, that is generally a nasty environment for gold. If nominal yields are rising because investors are worried about inflation persistence, enormous government financing needs and long-term purchasing power, the relationship becomes much less straightforward. Which takes us to the most interesting reaction of the day.

Gold was supposed to hate this data

On the surface, Friday’s setup should have been ugly for gold. Core CPI came in firmer than expected, Fed hike pricing surged, short-term Treasury yields rose and the 10-year stayed close to 5%. For a few minutes gold did exactly what the textbook says, dropping to around $4,296 straight after the release.

Then it turned. By 3pm London spot gold was trading above $4,400, more than $100 off the low, and late in the afternoon it was holding around $4,360, still about 1% higher on the day. It is lower than a week ago, down roughly 1.5% from the $4,430 it closed at last Friday, which is what you would expect with the 2-year up 25 basis points. What stands out is how small that loss is next to the size of the repricing.

That does not automatically mean gold is about to explode higher. It means the market is refusing to give us the clean textbook response, and when that happens I pay attention. The bigger picture, with levels, sits on the KenMacro gold forecast.

Gold can trade through two very different regimes. In a conventional tightening regime, hotter inflation means tighter Fed expectations, higher real yields and a stronger dollar, which raises the opportunity cost of holding an asset that pays no interest. That part is straightforward.

But gold also trades as a hedge against inflation uncertainty, fiscal credibility, geopolitical instability and currency risk. If yields stay high while the dollar fails to respond properly, and gold holds up despite increasingly hawkish Fed pricing, that second set of drivers is gaining weight.

That is why I never want to reduce the trade to “CPI hot, sell gold”. The number tells you what happened. The reaction tells you what the market thinks it means.

The dollar still has something to prove

The dollar did firm modestly after PPI on Thursday. After CPI, though, the response was far less explosive than the change in Fed pricing might lead you to expect. The dollar index spent the afternoon between roughly 99.0 and 99.1 and was barely changed on the day. It is actually a touch below the 99.16 it closed at a week ago, even though the 2-year has added about 25 basis points over the same five sessions.

Now compare that with what changed underneath it. September hike probability went from around 60% to close to 90%, the 2-year moved sharply, and US front-end yields sit well above those in the euro area and Japan. Under a very simple interest rate model that is a strong dollar environment, and yet DXY is not exactly ripping through the roof.

There are explanations. Other central banks are tightening too. The ECB raised its deposit rate by 25 basis points to 2.50% on Thursday, and the European Central Bank’s September monetary policy statement says plainly that “the Middle East conflict keeps driving up prices”. The BOJ is widely expected to tighten next week, and the Bank of England is dealing with its own energy-driven inflation problem.

The yen is doing most of the damage. USD/JPY has fallen from around 156.3 last Friday to about 153.7 as Japanese hike expectations hardened, and the yen carries 13.6% of the dollar index. Run the index weights and that one move knocked roughly a quarter of a percent off DXY this week. Strip it out and the dollar was up about 0.2%, which is still a modest return for a 25 basis point jump in the 2-year.

FX is relative. The Fed can be hawkish while the dollar struggles if everyone else is becoming hawkish at the same time.

So the dollar may be one of the most informative markets to watch after Wednesday. If the Fed hikes and DXY cannot sustain strength, that tells us something very important. The levels I am watching are on the KenMacro DXY dollar index forecast.

Oil is why the inflation story does not end with August’s CPI

August CPI is backward-looking. Oil is trading the future. The CPI release tells us what happened to consumer prices during August, but it does not tell us where inflation will be in October or November if oil stays above $100 and diesel stays this expensive.

Brent peaked around $108 on Thursday. It fell about 2.5% on Friday after Iranian state media said Tehran would meet Gulf states in Oman to discuss the Strait of Hormuz, yet it was still near $105 and on course for a weekly gain of roughly 9%, according to CNBC’s report on Friday’s oil market. The AAA national average for diesel hit a record $6.06 a gallon on Friday, more than 60% above a year ago, as CBS News reported alongside the CPI release. None of that is in the August data.

This is why the energy shock cannot simply be dismissed by saying core excludes energy. Of course it does, directly. But businesses still have to move goods. Trucks need diesel, aircraft need fuel and manufacturers need power, while farmers and warehouses have to get products to market.

Companies can absorb those costs through their margins for a while, and Thursday’s fall in trade services margins suggests plenty of them are doing exactly that. Eventually some of them pass the costs on. That pass-through is neither automatic nor immediate, but the longer elevated energy prices persist, the bigger the question gets.

PPI has already shown the pressure upstream. CPI has shown the first consumer impact, and airline fares are the clearest example. Now the Fed has to decide how much of that risk it is willing to tolerate.

It is an uncomfortable problem, because higher interest rates cannot produce another barrel of oil. All they can do is stop the energy shock from contaminating wider inflation expectations and demand.

The most interesting thing next Wednesday may be what Warsh says after the decision

The market is increasingly pricing a 25 basis point hike. If that happens, simply announcing higher rates may not be enough to create a lasting move, because markets will immediately want to know what kind of hike it is.

Is this one insurance hike, or the start of another tightening cycle? How worried is the Fed about energy, and how much does the Committee care about the pickup in monthly core? Does it believe policy is already restrictive? And what does the new Summary of Economic Projections say about inflation and the path of rates?

That last question carries real weight, because the September meeting comes with fresh projections. The Federal Reserve’s 2026 FOMC meeting calendar marks the two-day meeting on 15 and 16 September as a projections meeting. The statement is due at 2pm Washington time, which is 7pm in London, with Chair Warsh’s press conference half an hour later.

A 25 basis point hike accompanied by cautious guidance can trade very differently from exactly the same hike accompanied by a warning that inflation requires further tightening. The number on the screen will be identical in both cases. What it tells you about October and December will not be.

Next week is much bigger than the Fed

Wednesday gets most of the attention, and it should. But Thursday and Friday matter as well.

The Bank of England announces its September decision on Thursday 17 September. Bank Rate sits at 3.75% after a 6-3 hold in July, when Megan Greene, Catherine Mann and Huw Pill voted for a hike. The Bank’s July 2026 Monetary Policy Summary said the scale and duration of the energy shock, and how it propagates through the economy, will determine the policy stance required. It also contains a line worth keeping in front of you this week: “Monetary policy cannot influence energy prices”.

Then Japan follows. The Bank of Japan meets on 17 and 18 September, according to the Bank of Japan’s monetary policy meeting schedule. Its policy rate is currently 1%, and expectations for another 25 basis point increase to 1.25% have hardened sharply. All 52 economists in Bloomberg’s latest survey of BOJ watchers expect a hike on 18 September.

That matters far beyond Japan. If Japanese yields keep rising and the yen keeps strengthening, the economics of borrowing cheap yen to fund positions elsewhere become a lot less attractive. Anyone who has followed my recent work on yen intervention, the BOJ and the carry trade will know why I care about this.

The Fed may tighten on Wednesday. The BOE has to confront the same global energy shock on Thursday, and the BOJ could tighten on Friday. This is not simply an American rates story any more. It is a global repricing of the cost of money, and that changes capital flows everywhere.

My map for next week

I am not going into next week with a prediction that one asset “must” go up or down. I am going in with a list of things that need to confirm.

• If the Fed hikes and the 2-year extends higher, the dollar strengthens and gold loses support, the classic monetary policy trade is in control. Easy enough.
• If the Fed hikes, the 2-year rises and DXY still cannot rally, I want to know why.
• If gold stays firm while real and nominal yields stay elevated, I want to know what buyers are seeing that the simple rates model is missing.
• If the 10-year moves sustainably through 5%, I want to know whether Fed expectations are driving it or longer-term inflation and fiscal compensation.
• If the BOJ hikes and USD/JPY keeps falling alongside broad strength in the yen crosses, the carry trade story becomes considerably more important.
• And if oil falls sharply because the supply risks genuinely improve, I will reassess the inflation path rather than stay married to an energy narrative that is no longer true. Friday’s dip on the Oman headline was a small preview of that branch.

That’s the job. A macro view is not a marriage. It’s a decision tree.

The biggest lesson from this week

Last Friday the market received a much stronger labour report, and expectations changed. Thursday brought firmer producer inflation, and they changed again. Friday brought a slightly hotter underlying consumer inflation pulse, and they changed once more. Next Wednesday the Federal Reserve responds to all of it.

This is why I keep coming back to the same process, the one I set out in the free KenMacro macro framework. Start with the information. Ask what the market previously believed, then ask what the new information changed, and only then look at where money moved. The chart comes last.

Most traders do it backwards. They see gold fall, DXY move or a Treasury candle rip, and then go searching around X for an explanation, by which point they are already reacting. The better question is simple: what has the market just been forced to change its mind about?

This week the answer was pretty clear. The Fed hike went from possibility to base case, and now we find out whether the Fed agrees. Perhaps more importantly, we find out what happens if the markets that are supposed to confirm it refuse to do so.

That is where next week’s trade becomes interesting.

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Ken Chigbo has spent 18 years around financial markets and founded KenMacro to make institutional style macro thinking understandable to everyday traders.

Educational purposes only. Nothing in this article constitutes investment advice or a recommendation to buy or sell any financial instrument. Trading and investing involve risk.

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