Hot US inflation report seals Federal Reserve rate increase

A recent inflation report has prompted pressure on the Federal Reserve to raise interest rates during its December meeting, with a top policymaker predicting the Iran war's long-term impact on energy costs. According to US government data released on Tuesday, the Consumer Price Index (CPI) inflation accelerated 0.4% month-over-month in October, slightly slower than September's 0.6% but still above expectations.

Core inflation, excluding volatile food and energy prices, rose 0.3% month-over-month, also higher than forecasts. However, a year-over-year measure was not provided due to the October 2025 government shutdown. Analysts are virtually certain the Fed will raise rates at its final policy meeting of the year, with about 90% expecting a 25 basis points increase and 10% anticipating a larger 50 basis points hike, according to CME Group data.

Fed Governor Christopher Waller, an influential member on the rate-setting committee, stated he would support a 50 basis points increase if October's inflation remains consistent, emphasizing that a 25 basis points hike could jeopardize the Fed's credibility. Dallas Fed President Lorie Logan and other voting members on the Federal Open Market Committee have also indicated support for additional rate hikes throughout the winter.

The US central bank had left rates unchanged in October after a quarter percentage point increase in September, aiming to curb inflation that has remained above the 2% target for over five years. The recent rate increase was primarily driven by rising energy and food costs stemming from the ongoing Iran war. Grocery store inflation increased notably in October due to a series of steady readings, while the energy index showed moderation from a 5.2% increase in September to 0.7% in October.

Fed policymakers typically disregard energy price shocks due to their short-lived nature, but the nine-month conflict in the Middle East has reversed that viewpoint. The 10-year Treasury yield climbed back to 5%, while the 30-year Treasury yield increased to 5.36%, while the two-year Treasury yield rose 19 basis points to 4.736%.

Major Wall Street indexes traded in the red, reflecting the ongoing volatility caused by Democrats' midterms victory last week. Current Fed projections suggest rates will stay steady at 4.1% in 2027 before gradually easing in 2028, with their preferred inflation metric expected to end the year at 3.7% before moderating to 2.3% in 2027 and 2.1% in 2028.