Goldman Sachs economists said the odds for a third rate hike this year rose to 60 percent from 55 percent, after a significant firming in core inflation.
August CPI rose 0.4 percent and core, excluding fuel and food, rose 0.248 percent, the Labor Department reported Thursday. Goldman had expected core to rise 0.2 percent.
The firm noted that energy prices rose 2.8 percent due to Harvey-related disruptions at oil refineries in the Gulf Coast. It also noted core CPI was boosted by shelter costs, particularly lodging away from home, reversing a record decline in July.
That category, which includes hotels, was up 4.4 percent in August, after falling 4.2 percent in July. Barclays economists noted that the rise in lodging was the largest monthly increase in the two-decade history of that data, and some economists say the jump was likely due to the evacuation of storm victims to hotels.
"The inflation trend in that category now looks much more consistent with PPI- and industry-based hotel price measures. In addition to this temporary boost, underlying inflation also appeared to firm, with key shelter measures rising at a cycle-high pace," the Goldman economists wrote. They added that rent was up 0.39 percent and owners' equivalent rent was up 0.349 percent.
However, they pointed to some negatives. The education component saw a rare decline of 0.1 percent, and medical care commodity prices were down 0.1 percent after jumping 1 percent in July.
The Fed has targeted 2 percent for inflation, and because readings have been persistently softer, the market has doubted the Fed could raise interest rates again this year.
Fed Chair Janet Yellen has said the lower inflation is both transitory and a concern. But the fact that CPI was unexpectedly higher in August sparked market speculation that a rate hike is more likely.
However, many economists believe the Fed will raise interest rates at its December meeting, after it moves at next week's meeting to slow bond purchases and begin shrinking its balance sheet.
Goldman economists now estimate that the Fed's preferred measure of inflation — the core personal consumption expenditures index — rose 0.16 percent in August, or 1.34 percent from a year earlier.