Hot inflation report

October CPI: the Fed's December decision just got harder 🔥

Yesterday's print wasn't a disaster, but it was hot enough to matter. Headline CPI rose 0.4% m/m, down from 0.6% in September as energy inflation receded, while core rose 0.3% for the third month in a row. Consensus was 0.2%.

A few details stand out:

1) The FOMC (Dec 8-9). Fed governor Waller had said a 0.3% core print would make him consider 50bp. He got it. A quarter-point hike is now the base case, and the debate has shifted to whether it's 25 or 50. Hike pricing for December jumped to ~114 from ~84, and January pricing nearly doubled to ~47.

2) The curve. The two-year yield, the best proxy for Fed expectations, rose by the most since April 2025. With the front end leading, the move is about policy, not growth fears.

3) The bigger picture. Averaging BLS monthly CPI changes by regime:

• Pre-tariff baseline: 0.18%/mo

• Post-Liberation Day: 0.29%/mo

• Iran war period: 0.39%/mo

  
  

A 2% target means roughly 0.17%/mo. We haven't been there in a long time.

4) The economy. The October payrolls beat forecasts and Q3 GDP grew 3.4%. The Fed is being asked to tighten into strength, so the question is whether consumers can absorb higher mortgage, auto and credit card rates.

The risk is that inflation broadens beyond energy and the Fed has to prove its credibility at the cost of growth.

How are you positioning for a 50bp December? 👇

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