Hot Inflation Leaves December Fed Rate Hike Above 80% Odds

CME Group’s FedWatch put the probability of a December Federal Reserve rate hike above 80% ahead of Tuesday morning’s U.S. consumer-price report. The economic preview describes a December increase as widely expected after the Fed’s September hike, unless inflation has suddenly cooled.

What will the October CPI show?

A Wall Street forecast expects the consumer-price index to rise 0.3% in October, half September’s increase. Lower oil prices helped temper that estimate, but the preview treats 0.3% as evidence of persistent inflation and puts the implied yearly pace at 3.5% or more, far above the Fed’s 2% annual target.

Economists polled by The Wall Street Journal forecast a 0.2% rise in the core rate. The preview calls core inflation a better predictor of future inflation and says the measure has run between 2.5% and 2.9% for most of this year.

The preview adds: “That’s still somewhat uncomfortable for the Fed.” In plain terms, the forecasts show a slower monthly increase, not a return to the central bank’s target.

What does the missing 2025 CPI obscure?

Last year’s record-long government shutdown stopped the Bureau of Labor Statistics from compiling the October 2025 CPI, the first such lapse in the report’s history. The absence leaves a blank in the official record and prevents investors from seeing how much inflation rose over the full 12-month period through that month.

The preview says inflation has changed little overall. Bureau of Labor Statistics figures cited in the preview show the CPI rose 3.7% over 12 months through September, with core prices up 2.6% in the same period.

Without October 2025, those annual estimates probably undercount inflation slightly, according to the preview. It says the shutdown’s effects will not be largely in the rearview mirror until the December CPI. In plain terms, the missing month keeps the annual inflation rate from giving a complete picture.

Are tariffs still driving inflation?

Economists cited in the preview say the effect of the Trump tariffs on inflation is receding. They also say a massive boom in spending on artificial intelligence is now putting upward pressure on the prices of goods.

Prices for goods excluding food and energy rose 0.7% in the 12 months through September, according to figures cited in the preview. Goods prices fell in most years during the decade before the pandemic, and they were falling before the Trump administration put in place the biggest tariffs since World War II in spring 2025.

The preview does not quantify how much of that 0.7% increase reflects AI spending. In plain terms, the tariff effect is fading while AI spending is adding upward pressure.

Can services provide more relief?

The preview says services, especially housing, have been the biggest source of inflation until this year’s surge in oil prices tied to the Iran war. It identifies oil, rather than services, as the more recent source of upward pressure.

Service prices rose 3.1% in the 12 months through September, not far from their average annual increase of 2.8% from 2015 to 2019. The preview characterizes that pace as slightly faster than prepandemic trends but less worrisome now than it was a few years ago.

The preview nevertheless expects service costs probably are not going to slow much further or provide much more relief. In plain terms, services do not look likely to supply a decisive inflation cooldown.

What could stop a December rate hike?

The preview says only a shockingly small increase in October consumer prices, or no increase at all, could stop the December rate hike. It gives that outcome little weight.

“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. His assessment links the strong jobs report and resilient economy to the Fed’s limited patience with inflation.

An improving labor market and a rapidly growing economy could also help seal the decision, according to the preview. If inflation lands near the forecast, the September hike would be followed by a second increase in December.

Senior central-bank officials are closely split over whether they will need another rate hike in 2027, according to the preview. The preview leaves the central bank’s action next year unresolved. For investors, December is the near-term probability; the path through 2027 remains unresolved.