August's inflation report will be crucial for the Fed's interest rate decision

New inflation data coming tomorrow is expected to show that consumer prices rose 3.4% in August and could prove crucial as a divided Fed weighs whether to hike interest rates later this month.

Economists surveyed by Bloomberg expect to see prices jump 0.4% in August from a month earlier, faster than July's 0.1% monthly gain, with annual price gains holding steady at 3.4%.

"Core" inflation, which strips out volatile food and energy prices, is expected to decline slightly on an annual basis to 2.4% and hold steady with a 0.2% monthly gain.

Fed officials have been divided over whether to raise benchmark interest rates or keep them steady to further assess if past rate hikes are helping to reduce inflation.

Both core and headline inflation have come down this year since spiking in May at 2.9% and 4.2%, respectively, but remain well above the Fed's 2% target.

Fed Chairman Kevin Warsh emphasized in a speech last month that inflation is still too high, which many market-watchers interpreted as a sign that a September rate hike was on the table. But other Fed officials, including governor Christopher Waller and New York Fed president John Williams, have signaled they would likely vote to hold rates steady if the inflation rate continues to move lower.

Ultimately, the monthly inflation reading may prove less consequential than the underlying trend.

"While goods and services inflation should both moderate modestly, the report is unlikely to alter the message of limited inflation progress and should provide sufficient support for the Fed to hike rates at the September meeting," Bank of America economist Stephen Juneau wrote in a note on Thursday.

Other recent data points have Wall Street fairly convinced that the Fed will raise rates by 25 basis points next week. Oil prices surged past $100 a barrel , stoking new inflation fears, while new data showed that producer prices remained hot last month. And the US added 162,00 jobs in August, smashing expectations and easing some fears that another rate hike could weaken the labor market.

Traders see roughly 72% odds of a rate hike at the Sept. 16 meeting, according to CME FedWatch.

"Right now, regardless of how the Fed parses this potentially pivotal CPI read, all three consumer signals are pointing in the wrong direction: August gas prices are part of why headline inflation remains so high and well above core; elevated prices hurt household savings; and mortgage rates again hit 2026 highs today — a trend that looks poised to continue," Realtor.com senior economist Jake Krimmel said in a statement.

Claire Boston is a Senior Reporter for Yahoo Finance covering housing, mortgages, and home insurance.