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The likelihood that the Federal Reserve will raise interest rates next week surged Thursday as stubborn wholesale inflation and oil prices above $100 a barrel rattled financial markets. Traders also began assigning greater odds to another increase before the end of the year.

Futures pricing showed the probability of an increase climbing to 70 percent during morning trading, according to the CME Group FedWatch gauge. The market also placed the chance of an additional December increase near 60 percent as investors confronted a worsening inflation outlook.

“As the conflict with Iran drags on longer than many expected, inflation pressures are becoming increasingly entrenched, leaving investors in search of a catalyst strong enough to change the inflation narrative,” wrote Jeffrey Roach, chief economist at LPL Financial. “At this rate, a hike in rates next week appears likely.”

The producer price index rose 0.4 percent in August, matching the consensus forecast but confirming that price pressures remain firmly embedded in the production pipeline. July was revised upward to a 0.1 percent gain, helping lift annual wholesale inflation to 5.4 percent, slightly above expectations.

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That report matters because rising costs for manufacturers and suppliers often work their way toward consumers. Even when businesses cannot pass along every increase immediately, squeezed margins can restrain investment, hiring and future production.

Energy markets added another inflationary jolt as intensifying hostilities in the Middle East pushed United States crude prices up 4 percent. Oil moved just beyond the psychologically important $100 threshold, threatening higher transportation, manufacturing and household energy expenses.

“More pressure is coming because crude and refined products have kept rising since the August data was collected,” said David Russell, global head of market strategy at TradeStation. “The ongoing spike in oil, combined with low jobless claims, make it hard for the Fed to not hike next week.”

The European Central Bank delivered its own quarter percentage point rate increase and raised its inflation forecast. Officials there warned that the war involving Iran could produce deeper economic damage and a more persistent blow to consumer prices.

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Federal Reserve policymakers will receive their final major inflation report before next week’s meeting when the Bureau of Labor Statistics publishes the consumer price index Friday. The Dow Jones consensus calls for annual headline inflation of 3.4 percent, with the core measure excluding food and energy expected at 2.4 percent.

The Fed formally relies more heavily on the Commerce Department’s personal consumption expenditures price index. Chairman Kevin Warsh recently reiterated that the PCE index remains the central bank’s official benchmark for judging inflation.

The latest PCE report showed core inflation running at 3.3 percent in July, while the headline reading stood at 3.7 percent. Both figures remained above the central bank’s goal, leaving policymakers with limited room to declare victory over rising prices.

Bank of America senior United States economist Stephen Juneau estimated that the August producer price report puts monthly core PCE on track for a 0.26 percent increase. That figure would likely be rounded to 0.3 percent, reinforcing the case for tighter monetary policy.

“This could move significantly tomorrow after CPI, but if we are correct, it should greenlight a hike at next week’s Fed meeting,” Juneau said in a note. Bank of America maintains one of Wall Street’s most aggressive forecasts, projecting rate increases at three coming meetings.

That outlook is more hawkish than current futures pricing, but the combination of expensive energy, resilient employment and persistent supply chain inflation could force the Fed to act more aggressively. Allowing inflation to become entrenched would further punish savers and households whose wages fail to keep pace with living costs.

Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, cautioned that even a softer consumer inflation report would not necessarily eliminate the underlying problem. It could instead show that companies are struggling to transfer their rising costs to customers.

“Those who just look at consumer prices for their inflation information and interest rate predictions are not looking at the complete picture, and today’s PPI is evidence still of an inflation problem throughout the supply chain,” Boockvar said. Markets must now weigh whether the Fed will prioritize inflation control despite the higher borrowing costs that another increase would impose.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.