Here's what the Fed could do next after the hotter-than-expected August inflation report, according to investors

• The latest inflation report showed prices accelerated more than expected in August.
• The CPI rose by 3.7% year-over-year in August, above the 3.6% consensus estimate. 
• CME's FedWatch Tool showed markets are giving about 40% probability of another rate hike in November, and no hike in September. 

Inflation didn't cool as expected last month, and it's still well above the Federal Reserve's 2% target.

On Wednesday, the Bureau of Labor Statistics reported that inflation accelerated in August by 3.7% year-over-year. That's above July's annual increase of 3.2%, and above the consensus forecast of 3.6%. 

Markets are pricing in 97% odds that there is no hike at the September 20 Federal Open Mark Committee meeting, according to CME's FedWatch Tool.

For the November 1 meeting, the tool shows probabilities for the target rate to move 25 basis points higher to 5.50%-5.75% range are hovering above 40%. For the December 13 meeting, the probability for a 25 basis point hike is above 41%. 

As far as Wednesday's reading, higher energy prices pushed CPI higher, and expensive gas, travel, and shelter costs weighed on consumers. 

"As bulls argue that gasoline is traditionally volatile, only up temporarily, and that price gains in some of the other categories slowed, bears insist that continued geopolitical tension is a significant feature of the 2020s inflationary landscape, one that warrants higher-for-longer interest rates," José Torres wrote in a note after the data release.

"While this morning's report wasn't enough to push September's Fed meeting to live mode, November remains a tossup."

Jeff Morton, a portfolio manager at DWS Group, echoed that view, telling reporters in a media roundtable Wednesday that while some policymakers have alluded to a potential skip at the next meeting, that doesn't mean the tightening cycle is over. 

"We are approaching the end here, but we think they have to leave another hike on the table," Morton said. "November has to be an option for them until they get more data coming through that says we are heading to a soft landing and inflation and jobs start to turn."

He added that recent indicators have pointed to some weakness in the labor market and manufacturing, but not enough to guarantee imminent rate cuts. And, as tightening cycles come to a close, the odds of a policy error climb. 

"We have pushed back our cut forecast to later next year, at the pace of one cut per quarter barring any severe recession," Morton said.