Employees at Sunbin Grocery place items on shelves with price tags in Chinatown, New York City, USA.
Kylie Cooper | Reuters
While lower gas prices brought some relief to consumers in October, Federal Reserve officials are increasingly concerned that inflationary pressures elsewhere in the economy are becoming harder to contain.
Pump prices fell more than 4%, according to the Energy Information Administration, taking a breather from soaring prices that increased by more than $1 a gallon over the past year.
But this month’s consumer price index, released by the Bureau of Labor Statistics at 8:30 a.m. Tuesday, is expected to show only a slight increase.
Meanwhile, Fed officials say they are concerned that inflation, which initially rose due to President Donald Trump’s tariffs and the Iran war, has persisted more than expected and is creating price pressures beyond sectors directly affected by the shock.
At a time when central banks are increasingly confident about the state of the labor market, concerns about the cost of living are top of mind for the Fed.
“We’ve made progress toward what would historically be considered full employment, but all the big problems are on the inflation side,” Chicago Fed President Austan Goolsby said Monday at an event in his hometown. “We’re walking around and talking to people all over this district, and all we hear is business affordability, the cost of doing business.” “So we have to accept this cost and inflation failure.”
CPI values for all items are expected to rise by 0.3%. Core inflation, which excludes volatile food and energy costs, is expected to rise 0.2%, according to the Dow Jones consensus forecast. Both are slower than September’s monthly gains of 0.6% and 0.3%, but still represent further price pressure.
Annual statistics will not be conducted in October because the BLS was unable to collect some data to create a complete index level due to the government shutdown a year ago. Due to data issues, this index does not have comparable numbers.
Using assumed baseline interpolation data from the same period last year, Bank of America estimated annual growth rates of 3.8% headline and 2.7% core, both 0.1 percentage points higher than in September and well above the Fed’s 2% target.
Goolsby said the current rise in inflation defies what would normally be expected from supply shocks and tariffs, and the current situation is made worse by the build-up of hyperscalers related to artificial intelligence.
“It should have subsided by now,” he said. “And now we’re starting to see inflation accelerate in areas that don’t seem to be driven by oil prices or tariffs, such as many services. This is starting to look like old-fashioned demand overheating to me as we build out AI data centers.”
He added that huge investments in data centers are creating demand for construction workers, power and equipment, which could further increase price pressures even as AI promises long-term productivity gains.
pressure on interest rates
Although the Fed voted to keep its benchmark interest rate unchanged in October, the market has priced in a more than 80% chance that the Fed will raise rates at its next meeting in December, according to data from CME FedWatch.
Goolsby, who will not vote on interest rate decisions on the Federal Open Market Committee this year but plans to do so in 2027, did not say whether he would raise rates further, but said the current situation may merit action.
“Common sense is to act proactively to prevent the economy from overheating, because once it overheats, it’s very difficult to get rid of it,” he said. “So I think we have to be careful in that space.”
The CPI release comes as economic growth is strong (gross domestic product (GDP) was 3.4% in the third quarter and hovering at 3.5% in the last three months of the year, according to the Atlanta Fed), and the labor market also appears to be strong. Nonfarm payrolls increased by 165,000 in October, much more than expected, and although inflation-adjusted wage growth was negative, the unemployment rate fell slightly to 4.1%.
This focuses on predicting inflation rates.
Bank of America said it expects the impact of tariffs to wane, but that demand for AI could push commodity prices higher. The company is also wary of “high” service prices and pressure from health insurance and auto.
The bank is hawkish on its expectations for the Fed, seeing a rate hike in December as likely unless stock market declines escalate enough to deter the Fed.
“This will be the last inflation report before the FOMC’s Dec. 8-9 session. If our expectations are correct, all else being equal, we believe we are effectively locking in another 25 basis point rate hike,” BofA economist Stephen Juneau said in a note to clients. “Absent the undeniably soft 0.1% (mom) figure, we don’t think the inflation numbers will dissuade the Fed from raising rates in December. The bigger risk to our demands lies in financial markets.”
