October CPI to Guide Fed Rate Decision Amid Gas Price Relief
Falling gasoline prices and a strong jobs report set the stage for the October inflation data, which is forecast to show a 0.3% headline increase.
Gasoline prices declined by more than 4% in October, providing direct relief from inflation after a surge that added over $1 per gallon in the past year. The October consumer price index, due for release at 8:30 a.m. Tuesday, is forecast to rise 0.3% with core inflation up 0.2%. This data arrives with markets assigning over an 80% probability to a Federal Reserve quarter-point rate hike in December.
October CPI data expected to show moderating inflation
The consumer price index for all items is expected to show a 0.3% increase. Core inflation, which excludes volatile food and energy costs, is forecast to increase 0.2%. Bank of America estimates annual headline inflation at 3.8% and core inflation at 2.7% for October, both 0.1 percentage points higher than September. There will be no official annual CPI reading for October due to data collection issues from a government shutdown a year ago.
Strong labor market supports continued rate hikes
Nonfarm payrolls expanded by 165,000 jobs in October, far exceeding expectations, while the unemployment rate unexpectedly fell to 4.1%. Inflation-adjusted wage growth has been negative. Matthew Martin, senior U.S. economist at Oxford Economics, believes the latest jobs data reflect a tightening labor market and, with inflation clearly above target, further support a December Fed hike.
Persistent inflation beyond energy and tariffs
Chicago Fed President Austan Goolsbee said inflation pressures are proving more persistent than expected, with price increases emerging in sectors beyond those directly affected by tariffs and conflict. He stated that inflation is defying expectations from supply shocks, with price increases now appearing in services and due to AI-related data center construction demand. The massive investment in AI data centers is creating demand for construction workers, electricity, and equipment, potentially adding to price pressures.
San Francisco Fed President Mary Daly said she expects the Fed still needs to raise rates further, stating that controlling prices must be the top priority. St. Louis Fed President Alberto Musalem said inflation remains the top concern for businesses in his district and that bringing inflation down is the best way to promote growth and employment. Bank of America sees tariff impacts fading but warns that goods prices could rise due to AI demand and that services prices remain sticky, with particular caution about pressures from health insurance and autos.
Market pricing in December rate hike
Interest-rate futures markets sharply increased bets on a 25-basis-point Fed rate hike in December, with the CME FedWatch tool showing the probability now close to 80%. LSEG data show federal funds rate futures imply about an 80% probability of a hike at the December meeting, and the market expects roughly two more hikes in total this cycle. Nick Rees, head of macro research at Monex, said unless October CPI data come in well below expectations or November nonfarm payrolls deliver a major downside surprise, the market expects a 25-basis-point hike to be fully priced in.
The economic backdrop includes gross domestic product growth of 3.4% in the third quarter, with the Atlanta Fed tracking 3.5% for the final three months of the year. U.S. tech stocks endured a violent selloff recently, with the S&P 500 information technology sector plunging 7.3% on one day last week. The S&P 500 fell about 2.7% for the week, while the Nasdaq is down nearly 12% from its October record high, entering correction territory. Traders had earlier reduced rate-hike bets due to the tech-stock rout and weakening AI demand prospects, worried that a slowdown in related investment would sap growth and inflation pressure.
Geopolitical tensions add another layer of uncertainty. The Strait of Hormuz carries about one-fifth of the world's oil and liquefied natural gas shipments; if conflict in the region escalates again, energy supply and shipping costs could take another hit, pushing up global inflation pressure. Brent crude futures settled Friday at $98.32 a barrel, down as much as about 17% at one point for the week. The October CPI release will determine the immediate path for market expectations ahead of the Federal Reserve's December decision.
