October inflation came in hotter than expected, following a sharp rise in September prices, keeping inflation stubbornly elevated, reinforcing market expectations that the Federal Reserve will hike rates next month, and even fueling worries that the Fed could deliver a larger 50 basis point increase.
October CPI rose 0.4% month over month, above the 0.3% market forecast and a slight cooling from the 0.6% gain in September. Core CPI, which strips out volatile food and energy, rose 0.3% month over month, above the 0.2% estimate and matching September's pace. Due to last autumn's government shutdown, the Bureau of Labor Statistics did not publish the 12-month year-over-year inflation figure for October — no price data was collected in October 2025.
Capital Economics economist Thomas Ryan said the stronger-than-expected 0.3% monthly gain in core CPI in October was similar to September, with price increases broadly spread rather than driven by one-off or temporary factors. He said this almost confirms a December rate hike, and that two straight months of strong inflation raises the risk the Fed chooses a 50 basis point hike rather than 25 basis points.
Glenmede's head of investment strategy and research, Jason Pride, selected two key gauges to judge whether inflation is heading back toward target, and both weakened in October. Services prices excluding housing rose 0.5% month over month, the highest since May, with sticky services inflation still the core obstacle keeping inflation from returning to the 2% goal this year. Pride said this measure needs to fall to an average near 0.2% to provide solid evidence that overall inflation is moving toward the Fed's 2% target. At the same time, goods prices excluding food, energy and used cars rose 0.4% month over month, the highest since January.
Based on these trends, Pride warned investors that rates will stay at current levels or higher for much of next year, and that the policy path after December depends on whether services prices finally cool. The immediate question is how big the Fed's next rate hike will be. Edward Jones senior economist James McCann said, will the central bank raise rates by 25 basis points or 50 basis points, noting prices again rose more than expected. He said a 25 basis point move is the most likely outcome, especially given recent declines in oil prices and rising volatility in financial markets, but a 50 basis point hike cannot be completely ruled out. Interest rate futures markets are pricing an 85% chance of a 25 basis point hike next month and a 15% chance of a 50 basis point increase.
The Fed's policy credibility faces a test
Earlier on Tuesday, before the CPI release, Fed Governor Waller first raised the possibility of a larger hike in a speech in London. At the time he favored a 25 basis point hike in December but said it would depend on the inflation data. Waller said if October inflation came in above expectations — and Tuesday's data did — stronger policy action would be needed. In that case, he said, the December meeting should consider a 50 basis point hike, and a 25 basis point move alone would damage the Fed's policy credibility, a risk he was not willing to take.
Following the October inflation data, Deutsche Bank chief economist Matt Luzzetti updated his forecast to add a January hike. He now expects the Fed to raise rates by 25 basis points each in December, January and March. Luzzetti acknowledged that sticky and broadly spread inflation makes a 50 basis point hike possible, but it is not his base case. He said that before this data, Fed officials had largely reached a consensus on a gradual pace of hikes, tightening policy to suppress inflation while guarding against the risk of overtightening. He said the stronger-than-expected inflation report puts that gradual approach in a bind.
The gradual strategy was meant to fight stubborn inflation while absorbing the shock from recent stock market turbulence and worsening risk sentiment in AI-related sectors. But he also warned that if the tech stock selloff and widening credit spreads worsen further, it could ultimately force the Fed to pause and reassess the pace of aggressive tightening.
Natixis chief economist Christopher Hodge said that given sticky inflation and Waller's comments, a 50 basis point hike in December is a real possibility. Although inflation did not accelerate again, he said, the data further supports the view that the Fed risks falling behind if it does not act decisively. In his view, financial conditions will be the biggest uncertain variable. If there had been no market turmoil before the October meeting, the Fed would most likely have hiked anyway.
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