The U.S. consumer price index (CPI) for October rose by more than market forecasts. The rate of increase slowed from the previous month. But underlying price pressure appeared not to have eased. Federal Reserve rate-setters made successive arguments for further hikes. The market is already pricing in the possibility of a December rate hike.
According to data released by the U.S. Department of Labor on the 10th (local time), October CPI rose 0.4% from the previous month. The expert forecast compiled by Dow Jones was 0.3%. Compared with the 0.6% increase in September, the upward momentum eased somewhat.
Core CPI, which excludes food and energy, rose 0.3%. That is higher than the market forecast of 0.2%. Core CPI has risen 0.3% each month for three straight months since August. Although the pace of increase has slowed, analysts say inflation pressure is not easing readily.
By item, housing costs rose 0.3%, accounting for more than 30% of the total increase. Food rose 0.5%. Food at home rose 0.4% and food away from home rose 0.5%. Energy rose 0.7%. The increase was much smaller than the 5.2% of the previous month.
In the core category, leisure-related prices jumped 0.8%, car insurance 0.7% and education costs 0.3%. Used car and truck prices fell 1.2%.
This is the last consumer price release before the Federal Open Market Committee (FOMC)'s final regular meeting of the year on the 8th and 9th of next month. Price data could not be collected last October because of the federal government shutdown (temporary suspension of operations). For that reason, year-over-year increases from the same month a year earlier were not presented for most items in this release.
Just before the CPI release, Fed Governor Christopher Waller said in a speech at a Bank of England (BOE)-related conference in London that the FOMC should raise the benchmark rate by at least 0.25 percentage point at its December meeting. He said that if October core CPI rose by more than 0.3%, a stronger monetary policy response might be needed. In that case, his position is that a 0.5-percentage-point hike, a so-called "big step," should be considered at the December meeting.
Waller emphasized, "Raising the benchmark rate by only 0.25 percentage point could put our credibility at risk, and I do not want to take that risk."
He cited rising energy prices and cost pressure from increased artificial intelligence (AI) investment as drivers of price increases. He also said it must be checked whether energy price increases are spreading to prices of goods and services. He also noted that insurance premiums on tankers passing through the Strait of Hormuz and crude oil transshipment costs are pushing oil prices up by $20 to $30 per barrel.
Dallas Fed President Lorie Logan also added her voice to calls for tighter policy. At an energy conference jointly held by the Dallas and Kansas City Feds in Houston, Texas, that day, she said, "Given the current economic outlook, it remains clear that the FOMC should carry out at least two 0.25-percentage-point rate hikes." Logan had also argued for at least two hikes in a speech at Davidson College in North Carolina at the end of last month.
She said the pace of hikes could depend on near-term economic and financial conditions. She added that the FOMC could move faster this winter than it did this fall. She estimated that the current federal funds rate target range is at least 0.5 percentage point below the level that would moderately restrain economic activity enough to bring inflation back to the target.
Logan said tighter policy is needed to balance inflation and employment and that it is important to achieve it quickly. She warned, "The longer inflation stays above target, the greater the risk that it becomes entrenched in the behavior of economic agents."
She saw price pressure continuing across a broad range of areas, such as services prices, in addition to energy price increases stemming from the war in the Middle East. The core personal consumption expenditures (PCE) price index for September rose 3.1% from a year earlier. Core services prices excluding housing and transportation rose 3.2%. This means underlying pressure may not ease readily even once temporary shocks such as energy fade.
With CPI above expectations and hawkish (favoring monetary tightening) remarks continuing from Fed officials, the market reacted immediately. The 2-year Treasury yield, which is sensitive to monetary policy, rose more than 0.1% that day to 4.731%.