WASHINGTON — Financial markets are increasingly betting that the Federal Reserve will raise interest rates next week after a government report showed inflation accelerated in August, creating a politically fraught test for Chair Kevin Warsh. The Labor Department reported Friday that consumer prices rose 3.4% over the 12 months ending in August. Core inflation, which excludes volatile food and energy costs, increased 2.4%. Gasoline prices drove much of the monthly increase, while underlying prices also came in higher than economists had expected. Investors put the odds of a rate increase at more than 85% Friday, according to CME’s FedWatch tool. The Federal Open Market Committee is scheduled to meet Sept. 15 and 16. A hike would be the Fed’s first in more than three years, marking a sharp change from the rate-cutting expectations Trump has expressed since selecting Warsh to lead the central bank. Trump has said he wants borrowing costs reduced, while maintaining that the Fed should remain independent. The timing would add to the political sensitivity. The decision would arrive less than two months before midterm elections that will determine control of Congress. The White House and congressional Republicans are already facing economic pressure from elevated energy prices and an unpopular war that has helped push oil above $100 a barrel in recent days. Warsh laid out a case for prioritizing inflation in a speech last month in Jackson Hole, Wyoming, saying the Fed’s “predominant focus right now should be on prices.” Economists and investors now say failing to act could damage his credibility with markets. “If you don’t deliver after that big speech, people are really going to be like: ‘This is not a credible Fed,’” said Omair Sharif, president of Inflation Insights. The choice could affect households well beyond credit-card and auto-loan rates. A central bank seen as unwilling to contain inflation can drive up yields on long-term government debt, which in turn influences mortgage rates and other consumer borrowing costs. Some investors argue that a rate increase now could ultimately bring longer-term rates down by reassuring markets that the Fed is prepared to prevent inflation from becoming entrenched. “I understand where the administration is coming from: They don’t want higher rates,” said Joe Lavorgna, chief economist at SMBC Americas and a former senior aide to Treasury Secretary Scott Bessent. “However, the Fed needs to do what it feels is correct for the underlying health and performance of the economy.” Lavorgna said that, paradoxically, holding rates steady could produce the market reaction Trump is trying to avoid if investors conclude the Fed is not serious about fighting inflation. Senior White House official Kevin Hassett said Friday that the broader trend in prices remained favorable. “Frankly, I think inflation is clearly decelerating even with this slight uptick this month,” Hassett said in an interview with Bloomberg TV. Hassett said the White House respects the Fed’s independence but acknowledged that Trump is likely to continue pressing for lower rates. “He believes there’s plenty of room for interest rates to go down, and he voices that opinion while respecting the independence of the Fed,” Hassett said. Inflation has remained above the Fed’s 2% target amid the effects of Trump’s tariffs, strong consumer spending and renewed energy-cost pressures. The central bank must weigh those price increases against the risk that higher rates could weaken hiring, investment and household finances. The September meeting will therefore be more than a routine monetary-policy decision. It will signal whether Warsh intends to prioritize the Fed’s inflation mandate despite direct political pressure—and whether policymakers believe the latest increase in prices is temporary or evidence of a broader resurgence.