Wall Street was already growing nervous. Oil had pushed back above $100, bond yields were surging, the AI capital-expenditure boom continued to add pressure to credit markets, and Thursday’s producer-price report—which feeds into the Fed’s preferred inflation gauge—came in surprisingly hot.

But Chair Kevin Warsh’s ambiguity over the Fed’s next move, made Friday’s final inflation data before next week’s meeting unusually important. The outspoken Fed Governor Christopher Waller filled in the gap for traders, signaling that “it may not take much acceleration in inflation” to nudge him into supporting a hike.

The CPI then stepped over that low hurdle. Core consumer prices rose 0.3% in August, above expectations for 0.2%. Headline CPI climbed 0.4%, with gasoline prices jumping 3.9%.

Traders now price the probability of a quarter-point Fed hike next week at roughly 85%, up from 70% before the report. The 10-year Treasury yield climbed toward 5%, putting the psychologically important threshold within reach. Stocks didn’t sulk over the report, with all three indices shooting higher. 

For Main Street, the report was just another confirmation of the pressure that has defined the first half of the year, as wage growth decelerated for the fifth month in a row. Consumer sentiment came in Friday morning at another near-record low.

“We haven’t seen this type of income squeeze since 2012,” Gregory Daco, chief economist at EY-Parpletheon wrote on X.

The CPI’s outsized influence puts even more scrutiny on the guts of the report, where a few hundredths of a percentage point can suddenly take on enormous importance.

One of these marginal anomalies came from wireless telephone services, where prices surged 5.9% in August, the largest increase BLS has ever recorded for the category.

Cellphone service alone contributed 0.077 percentage point to the overall CPI increase, which is about one-third of core CPI’s total 0.230-point contribution. Excluding the category, core inflation worked out to roughly 0.2% increase rather than 0.3%.

And though Apple just unveiled a roughly $2,000 folding phone, smartphones themselves were not the culprit. Smartphone prices actually fell 1.7% in August and 12.2% from a year earlier, while the broader telephone-hardware category dropped 2.4% on the month.

That doesn’t mean the inflation report was benign beneath the hood. Energy prices are rising sharply and the latest spike in oil could still work into everything from airfare to consumer goods (plastics) over the coming months. 

The bigger concern for investors is that the inflation surprise is arriving alongside a bond-market selloff that is already tightening financial conditions.

Adam Turnquist, chief technical strategist at LPL Financial, said rates have recently “traded the stairs for the elevator.” A clear break above 5% on the 10-year, he said, would put the 2006-2007 highs around 5.25% to 5.35% into focus as a comparison. 

“With a 0.3% month-over-month increase in Core CPI, the Fed now finds itself with its back against the wall,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.

The remaining question is whether an AI-powered stock rally can keep shrugging off $100 oil, a nearly 5% 10-year yield, and a Fed that suddenly looks ready to start hiking again; although its rise after the decision release seems to welcome a hike.

As Zaccarelli put it: “Bull markets don’t die of old age, they’re killed by the Fed.”