Inflation held steady in August, with consumer prices rising 3.4% from a year earlier, matching July's pace but coming in slightly higher than economists had forecast as gasoline costs kept prices elevated.

The hotter-than-expected report increases the likelihood that the Federal Reserve will issue its first interest rate hike in more than three years next week, analysts said on Friday.

By the numbers
Economists polled by FactSet expected inflation to rise in August at an annual rate of 3.3%.

The CPI, a basket of goods and services typically bought by consumers, tracks changes in prices over time.

Inflation has moderated since hitting a three-year high in May, but remains stuck well above the Federal Reserve's 2% goal amid persistently high energy prices caused by the Iran war.

On Friday, the Labor Department said gasoline prices accounted for more than one-third of the monthly increase in the CPI report. Gasoline is up 27.4% from a year ago, although it increased 3.9% in August from the prior month.

Core CPI, which excludes the more volatile energy and food categories, rose at an annual rate of 2.4%, in line with economists' expectations and down from 2.5% in July.

However, Core CPI jumped 0.3% on a monthly basis, higher than economists had forecast, and representing an acceleration from its 0.2% pace in July.

What it means for interest rates
The latest CPI data could cement the Federal Reserve's interest rate decision, set for Wednesday, Sept. 16. Fed Chairman Kevin Warsh indicated in a speech last month at Jackson Hole that reining in prices remains the central bank's primary focus and that it will "have work to do" if inflation doesn't fade.

After Friday's release of the inflation data, the likelihood of a rate hike next week jumped to 90%, up from 70% the previous day, according to CME FedWatch, which bases its forecast on 30-day Fed funds futures prices.

Adam Crisafulli, head of investment advisory firm Vital Knowledge, said in a report that the latest CPI shows inflation is "still hot" and that it is "more than enough to justify" a Fed rate hike this month. He also expects inflation to remain elevated in September, given the recent spike in energy prices.

Ongoing energy price pressures
Energy prices have continued to rise in recent weeks amid an escalation of hostilities in the Iran war, with diesel hitting a painful new milestone of $6 a gallon on Thursday. Because diesel powers the trucks and railroads that transport goods around the U.S., the surge could ripple through the economy as businesses hike prices to offset their higher energy costs.

The national average for a gallon of diesel rose to a record $6.06 on Friday, up more than 60% from $3.71 a year ago, according to data from AAA.

The price of gasoline has continued its recent rapid rise, hitting a national average of $4.30 a gallon on Friday, AAA reported. The August data doesn't reflect the recent surge in gas and diesel prices, experts said on Friday.

"The challenge is that the data does not fully capture some of the inflation pressures that have emerged more recently, and there is little evidence to suggest inflation is returning to target in the near term," said Alexandra Wilson-Elizondo, global head and co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management, in a Friday email.

She added, "The survey period predates the latest move higher in energy prices, with Brent crude climbing above $100 as tensions around the Strait of Hormuz persist."

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