After six consecutive months of easing, the annual inflation rate, as measured by the Consumer Price Index (CPI), reversed course in October, climbing to 2.6% as expected.

This outcome casts doubt on the disinflationary trend that consumers and policymakers had hoped would persist, underscoring the challenging path ahead for the Federal Reserve’s 2% inflation target.

On Tuesday, Minneapolis Fed President Neel Kashkari cautioned that he might consider pausing a potential December rate cut if inflation data came in higher than anticipated.

Market-implied odds of a 25-basis-point cut in December were at 58% before the report’s release, according to the CME FedWatch tool.

October Inflation Report: A Wake-Up Call For Markets

The annual CPI inflation rate rose from 2.4% in September to 2.6% in October, in line with economist predictions.

Month-over-month, CPI increased by 0.2%, holding from both the prior and expected rate of 0.2%.

The core CPI rate, which excludes volatile energy and food prices to better gauge underlying inflation pressures, held steady at 3.3%, aligning with forecasts.

On a monthly basis, core CPI rose by 0.3% as expected.

Key Drivers Of October's Inflation Uptick

The shelter index saw a 0.4% increase, contributing to more than half of the overall monthly rise in all items. The food index also went up, increasing by 0.2%, with the food-at-home index rising 0.1%and the food-away-from-home index climbing 0.2%. The energy index remained steady in October, following a 1.9% decrease in September.

In October, indexes that rose included shelter, used cars and trucks, airline fares, medical care and recreation. Offsetting these rises, apparel, communication and household furnishings and operations were among those that declined.

Market Reactions

The October CPI report has elevated expectations for a December interest rate cut, with Fed futures now pricing in a 72% chance of a 25-basis-point reduction, up from 58% before the report.

The shift in interest rate outlook drove a dip in Treasury yields, with the rate-sensitive 2-year yield falling 7 basis points to 4.28%.

In premarket trading, equity futures responded positively in New York. Contracts for the tech-heavy Nasdaq 100 and the S&P 500 each climbed 0.2% as of 8:50 a.m. ET.

Small-cap stocks led the gains, with Russell 2000 futures surging over 1%.

Wall Street finished Wednesday in the red, as the SPDR S&P 500 ETF Trust ( SPY ) closed down 0.3%.

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