US CPI Heats Up Across the Board, Triggering "Inflation Spiral" Alert; October Rate Hike Odds Once Hit 50%. "New Fed News Agency": Watch Waller's Speech This Week

The US September CPI exceeded expectations across the board, with price pressures spreading from energy to core goods and services, causing the market to sharply increase short-term bets on a Federal Reserve rate hike in October. Whether inflation can continue to cool off and whether tighter monetary policy is needed more quickly have become the focus for investors going forward.

Data released on Wednesday, the 14th Eastern Time, showed that the US September CPI increased 0.6% MoM and 3.7% YoY, both above economists’ forecasts; core CPI excluding food and energy rose 0.3% MoM and 2.6% YoY, also exceeding expectations. After the report was released, market bets on a Fed rate hike in October climbed to about 50%, with US Treasury yields rising and US stocks under pressure. As the trading session progressed, the probability of a rate hike retreated to around 40%, indicating investors are still weighing inflation risks and whether the Federal Reserve will respond to a single month’s data.

After the CPI report, the market’s expected probability of a rate hike in October once rose to 50%, and for December it exceeded 95%, but both later retreated

Nick Timiraos, the journalist known as the “new Fed whisperer,” pointed out that unlike in August, where some of the price increases reflected strong individual factors, September’s core CPI outperformance was much broader: Core goods prices rose by about 0.25% MoM, the largest increase in a year; housing costs were up 0.39%; core services excluding housing jumped 0.42%, with its three-month annualized growth rate soaring from 1% in July to 4.6% in September. According to his figures, inflation pressure is no longer just a short-term shock from rising energy prices.

Timiraos believes the latest inflation report raises the importance of Fed Chair Powell’s upcoming public remarks on Thursday night Eastern Time (Friday morning Beijing Time). Previously, signals from the Fed’s meeting minutes and some Fed officials’ speeches suggested that the threshold for consecutive rate hikes might be higher than the market had expected; but after the broad-based strength in core inflation, whether the Fed will still wait for more data becomes a new policy suspense.

Media noted that after the CPI report, economists’ concerns about an “inflationary spiral” intensified and price pressures could become a key issue ahead of the US mid-term elections in November. Persistently rising energy costs, a rebound in core services, and diminished real wage purchasing power make the Fed’s policy choices more difficult: If inflation continues to spread, tight policy may need to last longer; if rate hikes further suppress consumption and investment, the burden on households and businesses could intensify.

Core goods and services strengthen simultaneously, making the road to lower inflation more tortuous

According to the US Bureau of Labor Statistics, September CPI YoY rose from 3.4% in August to 3.7%, and increased 0.6% MoM, the biggest monthly gain since April. Higher gasoline prices were a main driver of accelerating headline inflation, but core CPI also exceeded expectations, indicating price pressures outside of energy are also growing.

Timiraos noted on social media that September core goods prices rose 0.25% MoM, the largest increase in a year; housing costs increased by 0.39%; core services excluding housing rose by 0.42%. The latter’s three-month annualized growth rate rebounded sharply from 1% in July to 4.6% in September.

This data shows that price increases are not concentrated in a few items. Simultaneous strength in core goods, housing, and other services means the Fed can no longer simply attribute the inflation rebound to energy shocks.

Reuters quoted several market participants as saying that inflationary pressure is spreading to areas beyond energy. LPL Financial chief economist Jeffrey Roach believes the latest data suggest the “last mile” to returning inflation to target will still be bumpy, and rates may have to remain elevated for longer. Schroders senior economist George Brown also noted that core inflation above expectations shows domestic price pressures in the US have not continued to ease.

Rising energy prices may also be passed on to broader goods and services through transport, logistics, and other input costs. If companies continue passing costs to consumers, short-term energy shocks could turn into more persistent inflation issues.

Bets on rate hikes surged, but markets remain divided on October and December moves

After the CPI report, the rates market quickly repriced. Bloomberg reported that investors briefly pushed the probability of a Fed rate hike in October above 50%, but as trading went on, it retreated to around 40%. Pricing for total tightening by January next year also fell to around 40 basis points, lower than the 50+ basis points reached after the report's release.

This shows that, although the market has clearly boosted expectations for more rate hikes, there is still no consensus that the Fed will definitely move this month.

Some institutions have started adjusting their forecasts. Citi economists, previously skeptical of further rate hikes, added a December hike to their forecast after the September CPI, while still expecting the Fed to turn to cuts in 2027.

Karen Manna, Federated Hermes fixed income strategist and portfolio manager, said the strong CPI report is significant, but “one data point doesn’t make a trend.” She believes the report is more likely to slow the Fed’s process of gaining confidence that inflation is falling, rather than immediately speeding up rate hikes.

Others quoted by Reuters also generally believe the latest data strengthens the case for one more Fed hike this year, but October action will still depend on how policymakers interpret inflation trends. Some favor holding steady this month and hiking in December; others warn if energy prices stay high, policy tightening could go beyond current expectations.

“New Fed Whisperer”: CPI at least strengthens reasons for a December rate hike

Timiraos argued that the market now needs to judge: Will the Fed avoid hiking again in October simply because of one strongish inflation report, or does broader price pressure mean sooner action is necessary? He indicated that, at a minimum, this CPI report further strengthens the rationale for hiking again in December.

He noted investors will focus on Powell’s Q&A during the IMF annual meeting in Bangkok, starting at 11:30pm Eastern on Thursday (11:30am Beijing Friday).

He pointed out that this would be Powell’s last public statement before the Fed’s so-called blackout period for the October 27-28 monetary policy meeting.

Economists warn of “inflation spiral,” as real purchasing power and election pressures intertwine

The Wall Street Journal also highlighted the risk that inflation could become self-reinforcing. If households and businesses start generally expecting prices to keep rising, consumers may buy ahead of time, while companies may hike prices more aggressively, further elevating inflation expectations. However, rising inflation expectations do not automatically mean a wage–price spiral is forming; what happens next still depends on the labor market, consumer demand, and energy cost changes.

Navy Federal Credit Union chief economist Heather Long said Americans’ wage growth is being completely offset by inflation, and the Fed has yet to see any substantial progress on inflation; rising fuel prices are starting to pass through to other sectors.

This is also why inflation may become the central economic issue before the mid-term elections. Higher prices directly impact households’ daily costs; if nominal wage growth can’t keep up with prices, consumers’ real purchasing power will decline. Fluctuations in gasoline, food, and transport costs in particular can strongly influence voters’ feelings about the economy.

For the Fed, this means the policy dilemma is deepening: If energy and other costs continue pushing inflation up, relaxing policy prematurely could make it harder to bring prices down; but if rate hikes continue, mortgage, auto loan, and corporate financing costs could rise further, eating into household budgets and business investment.

US stocks and bonds under pressure, focus shifts to Powell’s remarks and inflation trends

After the inflation report, the market’s repricing of rate expectations hit risk assets. After Wednesday’s CPI, US Treasury prices plunged briefly, with the 2-year Treasury yield jumping 16 basis points to around 4.95%; US stocks gave back most of their gains after opening, with just a 1 basis point gain by the end of the bond trading day; the dollar index spiked, reaching an intraday high last seen in April 2025; all three major US stock indexes closed lower, with the S&P down 1.1% and the Nasdaq down nearly 1.9%, both hitting more than two-month lows and posting their third consecutive daily loss.

US Treasury yields spiked intraday on Wednesday before pulling back

For the stock market, higher rate expectations tend to weigh on valuations, especially in technology and other sectors sensitive to financing costs; for the bond market, if the market further prices in rate hikes, yields may continue rising and bond prices will face pressure.

Looking ahead, the market will closely watch Powell’s Q&A at the IMF meeting and subsequent inflation, employment, and energy price data. If core services prices continue to accelerate and energy costs stay elevated, the chances of a December rate hike will climb further; if upcoming data show inflation cooling and consumer spending and job growth also easing, the Fed may still opt to wait.

The latest CPI report is not enough to determine the Fed will definitely hike rates in October, but it significantly raises policy uncertainty and makes the case for a December rate hike more compelling. The real question for the market is no longer just how much short-term inflation will be pushed up by energy prices, but whether this shock is changing the inflation trend and the Fed’s policy path.