Hot October CPI Seen Tilting Fed to More Rate Hikes in 2027

With the Consumer Price Index posting a stronger-than-expected October increase, economists say a Federal Reserve interest rate hike looks like a done deal in December, and that could set the stage for rates to rise again in 2027.

The Bureau of Labor Statistics reported that the Consumer Price Index rose 0.4% month over month, above expectations, after rising 0.6% in September. Core inflation rose 0.3%, matching the September increase.

Economists expected CPI to rise 0.2% on a monthly basis, according to consensus estimates from FactSet. Core CPI was also expected to increase 0.2%. The BLS did not publish an annual inflation rate for October because of data disruption from last year’s government shutdown.

After a strong October jobs report released Friday, analysts had said odds were already in favor of the Fed raising its federal-funds rate target from its current 3.75%-4.00% range. With the CPI showing inflation stronger than economists predicted, that likely locks in a rate hike next month.

“Today’s hot inflation data guarantees a December rate hike, and more data like it will likely lead to multiple 2027 rate hikes,” says Preston Caldwell, Morningstar’s senior US economist. “Clearly, the lower inflation readings of the summer were a temporary reprieve, and there is still significant inflationary momentum propagating through the economy from the energy price shock and other forces.”

October CPI Inflation Report Highlights

• CPI rose 0.4% for the month after rising 0.6% in September.
• Core CPI rose 0.3% after rising by the same amount in September.

Shelter costs fed inflation, which rose 0.3% month over month. That increase accounts for more than 30% of the monthly overall rise in the CPI, according to the BLS. Other items showing higher prices included recreation, medical care, motor vehicle insurance, household furnishings, and education. Prices of used cars and trucks and communication “were among the small number of major indexes that decreased in October,” the BLS said.

Meanwhile, food costs rose 0.5%, and energy costs rose 0.7%. Energy costs rose 5.2% in September, and a 1.0% rise in gas prices was the smallest increase since declines in June and July.

“Some relief should be coming in terms of energy prices,” Caldwell says. “Since late October, gasoline and diesel futures prices have fallen nearly 20%. That should push down headline inflation, as well as mitigate further pass-through of energy inputs into core prices.” However, he adds that “the breadth of inflation, in conjunction with data on economic activity running a bit stronger than expected, does point to an inflationary problem that’s not going to go away even in the best case scenario for energy prices.”

More Aggressive Fed Rate Hikes Seen as Possible

In the wake of the CPI report, the Fed is seen as raising interest rates a quarter point at its Dec. 9 meeting, and at least once in 2027.

Expectations that the Fed will move more aggressively to raise rates were fueled by comments from Fed Governor Christopher Waller on Tuesday. He said he would support a rate hike in December and would back “more robust” tightening if “inflation comes in substantially higher than I expect.”

In the bond futures market, the Fed is given a 38% chance of raising the federal-funds rate to a target range of 4.50%-4.75% by July, and a 20% chance of raising it to 4.75%-5.00%.

“Today’s report puts additional pressure on the Fed’s 2027 policy-rate projections,” Janus Henderson portfolio manager Daniel Siluk wrote in a commentary Tuesday morning. “With inflation momentum moving in the wrong direction and underlying pressures proving persistent, policymakers may need to signal both a higher rate path and a greater willingness to keep policy restrictive for longer. The immediate question markets may pose will be 25 basis points versus 50 basis points in December, but ultimately, the more consequential debate is likely to be how much additional tightening is required in 2027.”