October CPI Forecasts Show Inflation Softening, but December Rate Hike Still Looks Likely

Key Takeaways

• Analysts expect Tuesday’s CPI report to show the rate of inflation slowed in October, but they don’t expect a softer reading to dissuade the Fed from raising interest rates next month.
• A slower increase in gas prices is seen as keeping a lid on the CPI for October.
• No annual inflation readings will be published for October, due to a data gap stemming from the government shutdown last year.

After hot readings in August and September, forecasts for the Consumer Price Index report due Tuesday show that the pace of inflation slowed slightly in October. Analysts say much of that slowdown is attributable to gasoline prices, which rose at a slower pace than in the two previous months, as well as falling prices for new and used cars.

Overall, economists expect the CPI rose at a 0.24% rate on a monthly basis, according to FactSet’s consensus estimates, far less than September’s 0.60% jump. They expect core inflation, which excludes volatile food and energy prices, rose at a monthly rate of 0.2%, compared with a 0.3% increase in September. The Bureau of Labor Statistics will not publish an annual inflation rate for October because of the data disruption from last year’s government shutdown.

But even if inflation slows slightly, analysts say the Federal Reserve is still likely to raise interest rates when it meets next month. Overall inflation remains well above the Fed’s 2% goal, as measured by the Personal Consumption Expenditures Index. “With inflation sticky above the target and the labor market stable, we think another hike will be warranted in December,” writes Christopher Hodge, chief US economist at Natixis. While a print in line with consensus expectations would be “encouraging,” he does not expect it to preclude the Fed from hiking.

UBS analysts say a smaller increase in energy prices, including gasoline prices, is the main driver of the slowdown in overall inflation in October. They find that gasoline and energy prices accounted for a 0.17-percentage-point increase in the overall inflation rate in August and a 0.39-point increase in September. In October, the estimated impact was just 0.04 percentage points.

Tuesday’s inflation data will also follow an unexpectedly hot October jobs report. But while the economy is adding jobs at a robust pace, wages are not rising at a pace that would exacerbate inflation. “There are currently no inflationary pressures emanating from the labor market,” says Preston Caldwell, Morningstar’s chief US economist, citing 3.1% annual wage growth that remains below the threshold consistent with 2.0% inflation. “But that could change if job growth continues to run hot.”

What Will the October CPI Report Mean for the Fed?

Strong jobs data “leaves inflation as the most important dimension of the Fed’s rate outlook going forward, and next week’s CPI report is likely to be very consequential,” Jason Pride, chief of investment strategy and research at Glenmede, wrote in a note to investors Friday morning. He says the Fed will remain biased toward tightening unless price pressures ease and the inflation rate falls closer to the central bank’s 2% target.

Bond futures markets see a roughly 80% chance of a quarter-point increase in the federal-funds rate hike when the central bank meets in December, according to CME FedWatch, up from 67% before the report was released. The funds rate target currently stands at 3.75%-4.00%.

The Long-Term Inflation Outlook

Beyond December, the outlook for the Fed and inflation is less clear. In general, analysts expect inflation to continue falling in 2027. Citi economists point to several factors that will put downward pressure on prices, including a “renewed slowing in shelter inflation, limited pass-through of higher energy costs to goods prices, moderate services prices, and stabilizing/falling airfares.”

Hodge of Natixis cites a steady labor market that isn’t putting upward pressure on inflation via wage growth, along with supply-side pressures that are expected to fade, like tariffs and the war in Iran. He expects an extended pause from the Fed beginning in the year.

Zooming out, Morningstar’s Caldwell forecasts 3.4% annual PCE inflation in 2026, 2.5% annual inflation in 2027, and 2.1% annual inflation in 2028. He says the fading impact of tariffs, receding energy prices in the aftermath of the Iran war, and slowing wage growth and housing inflation will all contribute to that softening.