According to data released Tuesday by the US Bureau of Labor Statistics (BLS), the United States' October headline and core CPI both came in above market expectations, indicating that price pressures remain elevated and reinforcing the case for the Federal Reserve to keep raising interest rates.
The US October CPI rose 0.4% month-over-month, above the market expectation of 0.3% and following a prior reading of 0.6%; core CPI, which excludes volatile items such as energy and food, rose 0.3% month-over-month, above the market expectation of 0.2% and matching the prior reading of 0.3% (there is no year-over-year data for October CPI and core CPI because a federal government shutdown in October of last year left the CPI data missing).
Breaking down the components, according to the BLS official data tables, energy prices rose 0.7% month-over-month in October, sharply narrowing from a 5.2% increase in September, with gasoline slowing from a 9.1% rise to a 1.0% rise. However, food prices shifted from flat month-over-month in September to a 0.5% increase month-over-month.
Within core inflation, housing rose 0.3% month-over-month (owners' equivalent rent rose 0.3% month-over-month and rent rose 0.2% month-over-month), transportation services rose 0.8% month-over-month, motor vehicle insurance rose 0.7% month-over-month, and airline fares rose 0.4% month-over-month; used vehicle prices instead turned to a 1.2% month-over-month decline.
After the release of the US October CPI data, the market increased its bets on Fed rate hikes. In addition to pricing in an almost 100% probability that the Fed will raise rates in December, the market raised its wagers on a 50 basis point hike next month and further increased bets that the Fed will hike at least twice by mid-2027.
In terms of financial market reaction, US Treasury yields moved higher — the two-year Treasury yield, which is sensitive to monetary policy, rose 16.54 basis points to 4.715%; the ten-year Treasury yield rose 9.03 basis points to 4.952%. The US Dollar Index DXY briefly rose nearly 30 points to 101.97. US stock index futures moved lower, with Dow futures down 0.17%, S&P 500 futures down 0.75%, and Nasdaq 100 index futures down 1.20%. Spot gold extended its intraday decline to 2%, reaching $4,043.4 per ounce; spot silver extended its decline to 3%, reaching $51.75 per ounce.
It is worth noting that this CPI report is the last inflation data before the Fed's December 8-9 policy meeting (November CPI is scheduled for release on December 10, the day after the decision, when year-over-year figures will resume).
Last week's release showed October nonfarm payrolls increased by 165,000, far exceeding expectations, while the unemployment rate fell to 4.1%. Combined with the lack of cooling in core inflation this time, the market's focus has shifted to whether the December rate hike will be 25 or 50 basis points.
More importantly, this CPI report may have landed right on the threshold for a larger rate hike that Fed Governor Waller mentioned on Tuesday. Waller said on Tuesday that he supports a rate hike in December and warned that if inflation continues to accelerate, he would support a 50 basis point hike to protect the Fed's credibility. Waller said that despite strong economic growth and a stable labor market, inflation remains too high. Waller said: "If, as I expect, October inflation improves on a month-over-month basis, I would lean toward supporting a 25 basis point increase in the policy rate." "But if the October CPI data released later today is similar to the readings of the past two months — with core CPI inflation around 0.3% or even higher — then stronger policy action may be needed. In that case, I think a 50 basis point hike should be considered at the December meeting." Waller's blunt remarks are the strongest signal yet from a Fed official that policymakers not only need to raise rates in December, but that the size of the increase could exceed the market's expected 25 basis points.
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