CPI comes in hot, raising odds of a bigger-than-expected December rate hike

The CPI iinflation reading for October came in hotter than expected early Tuesday, fueling the likelihood of a December rate hike from the Federal Reserve, which could even hit the half-point mark.

An important measure for inflation, the Consumer Price Index can provide advisors and their clients clues as to the Fed’s next rate move.

Core CPI, or the index for all items less food and energy, rose 0.3% in October, holding steady after rising 0.3% in September, according to the Bureau of Labor Statistics. However, economists surveyed by Dow Jones Newswires and the Wall Street Journal were looking for an increase of 0.2%.

On a seasonally adjusted basis, CPI increased 0.4% in October, after rising 0.6% in September. Economists were looking for an increase of 0.3%.

The Bureau of Labor Statistics did not collect data on 12-month percentage changes because of a lapse in appropriations, officials said. Economists had expected October CPI to rise 3.9% over the last 12 months, after rising 3.7% in September. On a year-over-year basis, economists had forecast that core CPI in October would rise 2.7%, after increasing 2.6% in September.

“This morning’s CPI report was especially short because they couldn’t do year-over-year comparisons due to the October 2025 government shutdown, but the current numbers of 0.4% month-over-month for the headline and the 0.3% month-over-month increase for core is still too high for the Fed,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a note.

“Given the higher-than-desired inflation, it is even more likely now that the Fed will raise rates in December and although some are calling for a 0.5% increase in the Fed Funds target rate, we expect that they will only raise rates by 0.25% next month,” he added. However, Zaccarelli thinks that the new question is whether or not the Fed will follow that up immediately with a second 0.25% rate hike in January, which he says would have been unexpected before today, or whether they will take their time and raise rates slowly next year.

Federal Reserve Governor Christopher Waller also thrust the possibility of a December rate hike into the spotlight Tuesday. CNBC reports that, during a speech in London, Waller said that he would support a quarter-point rate increase in December, but could push for a half-point increase if inflation is higher than expected.

“For the Federal Reserve, we think this cements the case for a December rate hike, particularly following Governor Waller’s comments earlier this morning around the risks from persistent inflation,” said Daniel Siluk, global head of short duration & liquidity and portfolio manager at Janus Henderson, in a note.

“While today’s 0.3% core reading meets the threshold Waller suggested could warrant consideration of a larger move, we still think a 50bp increase in December would be a high bar,” he added. "The immediate question markets may pose will be 25bp versus 50bp in December, but ultimately, the more consequential debate is likely to be how much additional tightening is required in 2027."

After the CPI data was released the CME's FedWatch tool puts the odds of a December rate hike at between 4% and 4.25% at 84.7%, down from 98.6% earlier on Tuesday morning. However, the odds of a hike to between 4.25% and 4.5% had increased to 15.3%, compared to 1.4% earlier.

Last week the October jobs report came in better than expected, also strengthening the case for a December Fed rate hike.

Last month the Federal Reserve hit the pause button, keeping the interest rate steady despite the ongoing pressures of elevated inflation.

In September the Fed raised interest rates for the first time since July 2023 in a unanimous 12-0 vote, defying months of pressure from President Donald Trump to make a cut.