Source: BIT Securities

Introduction: Tonight at 20:30, the market will receive the last inflation report before the FOMC meeting on October 27 to 28. What the market needs to guard against is not the overall CPI surge, which has been agreed upon due to rising energy prices, but rather the direction in which the core CPI may deviate from expectations. A 0.2% figure corresponds to a continuation of no action in October, while a 0.3% figure corresponds to a resurgence of interest rate hike expectations. New York Fed President Williams provided a new anchor on Tuesday, suggesting that one more rate hike this year is appropriate and that there is no need to raise rates further in 2027, noting that aside from the AI and energy sectors, he sees no widespread price pressures. This report will simultaneously test two directions.

I. The surge in overall inflation should be attributed to energy

The largest disturbance in September CPI data came from energy. According to AAA data, the average retail price of gasoline in September reached a record high of $4.33 per gallon, nearly $0.50 higher than the previous monthly record set in 2023. The EIA stated in its short-term outlook released on October 8 that U.S. retail gasoline and diesel prices rose significantly in September, averaging about $4.35 for gasoline and about $6.29 for diesel, driven by rising crude oil prices and increased refining margins. The report refers to the EIA's weekly survey showing a month-over-month increase of about +7.3% and a year-over-year increase of +37.6%, which could not be independently verified and showed discrepancies with the monthly average data, hence the text only employs directional expressions. Overall, CPI is expected to rise by 0.6% month-over-month and approximately 3.6% year-over-year, reflecting the market's consensus pricing of the energy shock.

The energy surge is not the core contradiction. Bank of America economist Stephen Juneau suggests that if core inflation comes in at 0.2% month-over-month, the market's expectations for a rate hike will not significantly heat up. If it reaches 0.3%, it may reignite speculation that the Fed needs to tighten further in October (as relayed by Futu).

II. Three reasons for slowing core inflation and three counterarguments

The baseline expectation for core inflation is 0.2% month-over-month, which is a slowdown from 0.3% in August. This is supported by three points.

First, a technical pullback in wireless telephone service prices. The core CPI in August exceeded expectations primarily due to a month-over-month surge of 5.9% in wireless telephone service prices, contributing about 0.10 percentage points. Nomura believes this temporary shock will significantly dissipate in September, forecasting a month-over-month core increase of 0.227%, while also indicating that airfare, healthcare, and housing still have upward pressure (as relayed by Futu).

Second, housing inflation tends to stabilize. According to public reports, the housing component is the largest single item in the CPI (weighing about 35%, which could not be independently verified). Barclays forecasts that in September, owners' equivalent rent will be 0.24% month-over-month, and primary residence rent will be 0.23%. Morgan Stanley predicts these figures will be 0.25% and 0.20%, respectively, and points out that housing inflation has averaged about 0.24% monthly since May, slightly lower than the long-term trend of about 0.26% before the pandemic.

Third, core goods lack upward momentum. Barclays and Morgan Stanley forecast the month-over-month change for core goods will remain in the range of 0.13% to 0.14%, roughly unchanged from August. Morgan Stanley predicts that September auto insurance premiums will decline by 0.20% month-over-month, with negative growth potentially continuing until 2027 (as cited by the media). The slowdown in core goods inflation indicates that the current high levels are primarily driven by localized energy shocks, with limited diffusion to core consumption and services.

Counterarguments are similarly specific. The RBC economics team led by Mike Reid believes the likelihood of significantly slowing core inflation is limited; if core inflation remains high for a second consecutive month, the possibility of an October rate hike may arise again. Futu's report lists upward risks including airline tickets, hotels, auto parts, and the recent surge in diesel prices impacting commodity costs. CIBC's chief economist Shinfeld expects a core increase of 0.3% and believes a rate hike will happen this month, arguing that "too many categories are growing at a pace exceeding 3%."

III. The divergence between 0.2% and 0.3%, which side does the market stand on

CME FedWatch shows that traders currently believe there is approximately a 77% chance the Federal Reserve will keep interest rates unchanged this month, up from about 51% a month ago (as relayed by Futu, data from October 14). The 17% chance of a rate hike mentioned in the report differs from this statistic; the text uses the approximately 77% figure, which corresponds to just over 20%. The market has currently priced in expectations for a cumulative total of three rate hikes, including September (as relayed by Futu). Investment banks also have layered assessments; Piper Sandler's Kurt Lewis predicts that the Fed will evaluate the inflation outlook after three cumulative rate hikes. Stifel's Lindsey Piega believes at least three to four more rate hikes are needed to control inflation (this viewpoint represents only that particular institution's judgment). Williams’ statement on Tuesday served as an anchor in the opposing direction, suggesting that one more rate hike this year is appropriate, no further tightening is needed in 2027, and there are no signs of inflation driven by the labor market.

IV. Policy background: The minutes include energy and AI as inflation causes

The minutes from the September meeting (released on October 7) showed that 19 officials unanimously supported raising rates by 25 basis points to a range of 3.75% to 4.00%, marking the first hike since July 2023. Most participants believed that further increases to the target rate range this year could be appropriate, while also emphasizing an open attitude towards each meeting. The minutes noted that ongoing geopolitical situations have driven up crude oil and refined oil prices, and the surge in AI-related investments has also exacerbated inflation pressures. Fed staff raised their inflation forecasts for 2026 to 2028, expecting inflation to return to 2% in 2029, a year later than predicted in July. Several officials observed that the impact of AI developments seems to be increasing, while the effects of tariff increases are diminishing. Some officials also believed that the current interest rate levels only have a moderate limiting effect. These statements, when placed alongside Williams’ dovish remarks, indicate that divisions within the Fed focus on pace rather than direction, and tonight's core CPI will be the next input variable in this divergence.

V. Three numbers to watch tonight

First, the relative position of core CPI month-over-month to 0.24%. A figure of 0.2% or lower would cool rate hike expectations, providing breathing room for high-value assets. A figure above 0.25% could raise expectations for a rate hike in December, potentially leading long-term yields to test previous highs.

Second, the month-over-month change for the housing component. If OER and rents continue to hover around 0.2% to 0.25%, the benchmark path for core inflation will not be disrupted. If they begin to rise again, the narrative of core slowing will need to be rechecked.

Third, core service prices. In August, core service growth was about 3% (reported). Service price increases often last for several months, and their trend reflects inflationary stickiness better than overall CPI. Thursday's PPI will also be used for the Fed's preferred core PCE accounting; both data sets will be included in the input list for the October 28 meeting.

Based on the overall situation and publicly available information, one possible scenario is that the overall reading is slightly high, the core meets or approaches expectations, and the pricing for holding steady in October continues. If core falls on the side of 0.3%, consensus on the pace adjustment will need to be reassessed.

Data Explanation

• CPI expectations: Bloomberg survey as relayed by Futu, statistics prior to the release on October 14, 2026.

• Energy prices: AAA monthly average, EIA short-term outlook (October 8). The month-over-month figures of the weekly EIA survey referenced in the report have not been independently verified and differ from the monthly average data.

• Component forecasts: Barclays, Morgan Stanley, Nomura, RBC, CIBC, Bank of America as referenced by the media.

• Minutes and official statements: September FOMC minutes (released on October 7) and Williams' statements on Tuesday, as relayed by the media.

• Rate hike probability: CME FedWatch as relayed by Futu, data from October 14.

Disclaimer: The content of this article is for general information and market commentary purposes only, compiled based on publicly available information up until the time mentioned in the text. Relevant market data, expectations, and probabilities may change with market conditions. The views and investment strategies cited from third-party institutions, analysts, or individuals only represent the views of those third parties at that specific time and do not reflect BIT's views or recommendations. This article does not constitute investment advice, research, invitation, solicitation, or recommendation for any securities, investment products, or trading strategies, and should not be used as a basis for any investment decision. There are risks in financial markets, and prices and market performance may fluctuate; past performance and prior market trends do not represent or guarantee future results. Investors should independently assess the relevant risks based on their situations and seek professional advice when needed. BIT's Hong Kong stock trading service is not offered to residents of Hong Kong or other restricted jurisdictions.

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