The Fed Will Have To Acknowledge This On Wednesday

There's little doubt that inflation is heating up in America.

Earlier today, we learned consumer prices climbed 0.4% month-over-month in May, which was higher than the 0.2% expected by economists.

Excluding food and energy, CPI increased by 0.3%, which was a tick higher than the 0.2% expected. This was the strongest gain in core CPI since August 2011.

On a year-over-year basis, prices climbed by 2.1% and 2.0% respectively.

"With core CPI inflation rising to 2.0% in May, from 1.8% in April, the Fed will have to acknowledge in tomorrow's policy statement that price pressures are building," said Capital Economics' Paul Dales."The chances that it will hike interest rates before the middle of next year are increasing."

Some folks might be taken aback by that "2.0%" number as the Fed has mentioned that number as its longer run inflation target. And the Fed's Federal Open Market Committee (FOMC) is currently holding its two-day meeting to discuss and decide the direction of monetary policy.

However, the Fed is widely known to favor inflation as indicated by core PCE over core CPI.

"Admittedly, core inflation on the Fed's preferred PCE measure was still just 1.4% in April," added Dales. "But the same cyclical and medical factors will drive this measure above 2% early next year, if not earlier."

The FOMC statement gets published at 2:00 p.m. ET on Wednesday.