Hot U.S. inflation hasn't cooled off. Rising consumer prices to keep Fed rate hike on track.

By Jeffry Bartash

Rising prices point to the Fed increasing borrowing costs before Christmas

Americans are fed up with persistent inflation and high gas prices.

The Federal Reserve seems all but certain to raise interest rates again soon unless inflation has suddenly cooled off - and there's no sign of that happening.

The consumer-price index for October, due out Tuesday morning, is expected to confirm inflation remained still stubbornly high. Here's what to watch in the CPI report - including one big catch.

Wall Street forecast

Consumer prices probably rose 0.3% in October, just half as much as the increase in September. Lower oil prices (CL00) (BRN00) lent a helping hand for a more mild increase.

Yet even a 0.3% increase in the CPI is evidence of persistent inflation. It suggest prices are rising at a yearly 3.5%-plus rate - far above the Fed's 2% annual inflation target.

The so-called core rate of inflation, meanwhile, likely rose 0.2% last month, economists polled by the Wall Street Journal forecast. That's still somewhat uncomfortable for the Fed.

The core rate is viewed as a better predictor of future inflation. It's been running between 2.5% and 2.9% for most of this year.

Missing in action

What the October CPI won't tell investors - officially, that is - is how much inflation has risen in the past 12 months.

How come? A record-long government shutdown last year prevented the Bureau of Labor Statistics from a compiling the CPI report for the first time in history. It's just a blank in the record books.

But no matter: The rate of inflation hasn't changed much. The CPI rose at a 3.7% pace in the 12 months ended in September. The core rate was up 2.6% in the same span.

The absence of the October 2025 CPI means those estimates are probably slightly undercounting inflation.

It won't be until the December CPI that the effects of the 2025 government shutdown are largely in the rearview mirror.

Tariffs and AI

Economists say the effect of the Trump tariffs on inflation are receding, but the massive boom in spending on artificial intelligence is now putting upward pressure on the prices of goods.

The cost of goods - minus food and energy - rose 0.7% in the 12 months ended in September. That might not sound like much, but goods prices fell in most years in the decade before the pandemic.

Goods prices were also falling, not rising, before the Trump administration in the spring of 2025 put in place in the biggest tariffs since World War II.

Services

The cost of services, especially housing, has been the biggest source of inflation until the surge in oil prices this year tied to the Iran war.

The cost of services are rising slightly faster compared to prepandemic trends, but they are less worrisome now than they were a few years ago.

Service prices rose 3.1% in the 12 months ended in September, not far from the average 2.8% annual increase from 2015 to 2019.

Service costs probably aren't going to slow much further, however, or bring any more relief on inflation.

Fed reaction

The Fed is widely expected to raise interest rates again in December, following up on its last rate hike in September. An improving labor market and rapidly growing economy could help seal the deal.

"In the wake of a blowout jobs report and other signs of a resilient economy, the Fed is going to have little patience with inflation," said BeiChen Lin, senior investment strategist at Russell Investment.

Investors put the odds of a rate hike next month at more than 80%, CME Group's FedWatch shows.

About the only thing that might stop the Fed would be a shockingly small increase - or no increase at all - in the October CPI. Don't count on it.

What action the Fed takes next year is still an open question. Senior central-bank officials have been closely split over whether they will need another rate hike in 2027.

-Jeffry Bartash

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(END) Dow Jones Newswires

11-09-26 1601ET