Bad news on inflation hardened expectations the Federal Reserve will keep raising interest rates in half-point steps through September, with talk of an even larger move mounting in the conversation.

Investors increased bets on a 75 basis point hike after data Friday showed consumer-price growth accelerating to a fresh 40-year high and a separate report in which expectations deteriorated, though Fed watchers generally doubt Chair Jerome Powell would take that step next week.

“Even in these fast-moving times, the Fed is likely to be reluctant to surprise markets, which keeps the chance of a 75 basis-point surprise at next week’s meeting small,” said Sarah House, senior economist at Wells Fargo & Co. “However, we could see Chair Powell at the post-meeting press conference more clearly signal that 75 basis-point hikes are on the table for future meetings if we don’t see a let-up in inflation.”

Powell will hold a press conference after the conclusion of the Fed’s two-day meeting on Wednesday. He’s already put half-point moves on the table for this month and next and said officials will keep pushing until they see “clear and convincing” evidence prices are cooling.

There was scant sign of that in Friday’s data. The consumer price index increased 8.6 per cent from a year earlier in a broad-based advance. Core CPI, which strips out the more volatile food and energy components, rose 0.6 per cent from the prior month and 6 per cent from a year ago, also above forecasts.

In more unwelcome news, the University of Michigan’s preliminary June sentiment index slumped as surging prices battered US households, with survey respondents expecting prices to advance 3.3 per cent over the next five to 10 years, the most since 2008 and up from 3 per cent in May.

The Powell Fed has been careful to telegraph policy shifts well in advance. While he pushed back against a 75 basis-point hike at the May meeting after his St. Louis Fed colleague James Bullard said that might be worth considering, Powell has not taken anything permanently off the table and has stressed the need for policy to be nimble.

The desire to avoid ambushing markets pushed against a super-sized move next week. Even so, economists at Barclays Plc and Jefferies both switched their calls after the May CPI print to an imminent 75 basis point increase.

What Bloomberg Economics Says...

• “With the next CPI report likely tracking at about the same monthly pace, the chance for a new peak in year-over-year inflation is high. That will likely keep the Fed on a trajectory of 50-basis-point hikes beyond July, even though the economy is cooling.” -- Anna Wong and Andrew Husby (economists)
• “The US central bank now has good reason to surprise markets by hiking more aggressively than expected in June,” Barclays economists led by Jonathan Millar wrote in a note Friday. “We realize it is a close call and that it could play out in either June or July. But we are changing our forecast to call for a 75 basis point hike on June 15.”

The last time the Fed raised rates by that amount was under then Chair Alan Greenspan in 1994.

Americans are fuming over higher prices, caused by pandemic supply-chain tangles, surging energy costs due to the war in Ukraine, and too much stimulus from fiscal and monetary policy. Powell, who has acknowledged the Fed underestimated inflation and could have started to tighten sooner, can expect heavy questioning later this month when he testifies before Congress.

“If these high month-on-month numbers continue, increments of 50 basis points beyond July become much more likely. And I wouldn’t exclude 75 basis-point increments either,” said Roberto Perli, head of global policy research at Piper Sandler & Co. “Powell said they were not under active consideration in May, but they may well be considered in the future if inflation does not show signs of abating.”