A hotter-than-expected inflation report has placed renewed pressure on the Federal Reserve to hike interest rates during its December meeting, with a senior policymaker noting that the ongoing conflict in Iran is likely to have a lasting impact on energy costs.
US government data released on Tuesday indicated that Consumer Price Index inflation rose at a 0.4 per cent monthly rate in October; while this was a deceleration from the 0.6 per cent pace seen in September, it still exceeded market expectations.
Core inflation, which strips out volatile food and energy categories, climbed by 0.3 per cent last month, also coming in higher than anticipated. The Bureau of Labour Statistics did not provide a year-on-year figure due to the government shutdown in October 2025.
Traders have essentially priced in a rate hike for the Fed’s final policy meeting of the year. According to data from the CME Group, roughly 90 per cent of market participants expect a 25-basis-point increase, while about 10 per cent are bracing for a more aggressive 50-basis-point move.
These expectations were largely driven by Fed governor Christopher Waller, a key member of the central bank’s rate-setting committee, who stated prior to the report’s release that he would support a 50-basis-point hike next month if October’s inflation data remained robust. Such a move would represent the Fed’s most significant rate increase since 2022.
“Hiking only 25 basis points would put our credibility at risk; a risk I am not eager to take,” Mr Waller told an event in the UK.
Karl Schamotta, chief market strategist at Korpay, wrote in a note: “The last consumer inflation update before the Fed’s early December meeting took on added significance this morning when Governor Christopher Waller indicated he would vote for a rate hike.”
Dallas Fed president Lorie Logan, another voting member on the Federal Open Market Committee, further bolstered expectations for a December rate hike when she told an audience in Houston that she supports at least two more increases.
“It may be possible to move more rapidly this winter than the FOMC has moved so far this fall,” Ms Logan said.
The US central bank held interest rates steady in October <a s 2 per cent target for <a s price increases were fueled by rising food and energy costs, which remain elevated due to the war in Iran. The Bureau of Labour Statistics reported that four of the six major grocery store food group indexes rose last month, while one declined. The energy index cooled from a 5.2 per cent increase in September to 0.7 per cent in October.
“Grocery-store inflation accelerated notably after a string of quiescent readings, underscoring the lags between energy price shocks and non-energy consumer prices,” wrote Bernard Yaros, deputy chief US economist at Oxford Economics.
US central bankers generally look past energy price shocks because they tend to be temporary, though the nine-month conflict in the Middle East has—for the time being—altered that outlook.
“And there are reasons to also expect elevated energy prices to persist,” Mr Waller said. “First, even as there is increased tanker traffic through the Strait of Hormuz, that traffic is moving at great expense.”
Mr Waller noted that maritime insurance costs for passing through the waterway, combined with the ship-to-ship transfer of oil to mitigate the risk of Iranian attacks, are reportedly adding between $20 and $30 per barrel to oil prices.
Mr Waller, who was a finalist for the Fed chairman position last year, added that diesel production is being constrained by limited refining capacity and other factors.
“As a consequence, elevated prices for diesel in the United States are not expected to moderate as readily as crude oil prices would in a more peaceful Middle East,” he said.
The yield on the 10-year Treasury, a primary benchmark for borrowing costs, rebounded to 5 per cent following the CPI report, while the 30-year Treasury yield climbed more than 10 basis points to 5.36 per cent. The two-year Treasury yield, which is highly sensitive to short-term Fed policy, rose 19 basis points to 4.736 per cent.
Major Wall Street indexes traded in the red, extending a period of <a sweeping victory in the midterms last week. The dollar strengthened against a basket of currencies, while spot gold and silver prices declined.
Current Fed projections suggest that rates will remain at 4.1 per cent throughout 2027 before beginning a gradual decline in 2028.
The Fed’s preferred inflation gauge is projected to finish the year at 3.7 per cent before cooling to 2.3 per cent in 2027 and 2.1 per cent in 2028. Central bankers are scheduled to update these forecasts next month.
