December Rate Hike Odds Surge to 85% After US October Core CPI Rises 0.3% MoM

TradingKey - U.S. inflation in October once again topped market expectations, driving investors to increase their bets on a large interest rate hike by the Federal Reserve in December. Although headline price gains slowed from September, core inflation maintained the same pace for a third consecutive month, indicating that price pressures have yet to meaningfully subside.

The U.S. Bureau of Labor Statistics reported on November 10 that the headline Consumer Price Index (CPI) rose a seasonally adjusted 0.4% month-over-month in October, slowing from 0.6% in September but higher than the market expectation of 0.3%; core CPI, which excludes food and energy, rose 0.3% month-over-month, also topping expectations.

Following the release of the data, according to the CME FedWatch Tool, the probability of a 50-basis-point rate hike in December rose from 1.1% to 15.3%, an increase of 14.2 percentage points; the probability of a 25-basis-point rate hike was 84.7%, remaining the market's primary expectation.

Core CPI Rises 0.3% for Third Straight Month as Cooling Energy Fails to Ease Inflation Pressure

Headline CPI gains narrowed in October as energy price growth cooled significantly. The energy index rose 0.7% month-over-month, down from 5.2% in September, with gasoline price growth slowing from 9.1% to 1.0%. However, continued price increases in shelter, food, and various services kept headline inflation above market expectations. The shelter index climbed 0.3%, contributing more than 30% of the month's overall CPI increase. Food prices rose 0.5% after holding flat in September, with food at home rising 0.4% and food away from home up 0.5%.

The persistence of core inflation warrants even greater attention. Core CPI has increased 0.3% month-over-month for three consecutive months. In October, prices for recreation, motor vehicle insurance, and medical care rose 0.8%, 0.7%, and 0.3%, respectively. Although prices for used cars and trucks fell 1.2%, the decline failed to drive a further pullback in core inflation.

Brian Jacobsen, chief economic strategist at Annex Wealth Management, noted that the issue is not only that headline inflation remains elevated, but also that the oil price shock has passed through to core inflation. Even if energy prices stop climbing rapidly, the fuel costs previously absorbed by businesses could still continue to be passed along to consumers through the prices of goods and services.

AI Investment Faces Dual Financing and Cost Pressures as Bets on Big December Rate Hike Heat Up

This report is the final CPI reading ahead of the Federal Reserve's Dec. 8–9 policy meeting, putting officials' earlier remarks about accelerating tightening under greater scrutiny.

Federal Reserve Governor Christopher Waller said ahead of the data release that if core CPI rose 0.3% or more month-over-month, the Fed might need to raise interest rates by 50 basis points. The latest data met the threshold he outlined, prompting markets to reassess the size of a rate hike in December.

Market bets on longer-term tightening also increased. Following the data release, the probability of cumulative rate hikes of 50 basis points by January 2027 stood at 48.8%, while the probability of cumulative rate hikes of 75 basis points was 7.4%. These cumulative magnitudes reflect the changes relative to current interest rate levels by that time.

AI investment has also entered the inflation debate. Jacobson believes the Federal Reserve may focus more on the demand that data center construction generates for skilled labor such as electricians and plumbers, as well as whether investment expansion is crowding out resources from other economic activities and driving up costs.

This puts dual pressure on companies relying on debt-financed expansion: rising construction and operating costs require more capital deployment, while persistently high interest rates increase the interest burden on new borrowings and refinancing, squeezing profits and cash flow.

Joe Saluzzi, partner and co-head of equity trading at Themis Trading, noted that a 50-basis-point rate hike might be too aggressive, but the latest data once again highlights the stickiness of inflation. He pointed out that if high inflation and elevated interest rates persist, companies reliant on borrowing will face greater earnings pressure, which will ultimately be reflected in their stock prices.