Original | Odaily Planet Daily (@OdailyChina)
Author | Golem (@web 3_golem)
U.S. inflation has once again dampened the capital markets.
On October 14, the U.S. Department of Labor released the September CPI: it rose 3.7% year-over-year, higher than the expected 3.6% and above the 3.4% recorded in August; the core CPI, excluding food and energy, increased 2.6% year-over-year, also exceeding the expected 2.5% and reaching the highest level since June.
After the data release, U.S. Treasury yields surged and the dollar strengthened, leading to broad declines in global risk assets. According to MSX.COM data, all three major U.S. stock indices closed lower: the Dow fell 0.09%, the S&P 500 dropped 1.11%, and the Nasdaq declined 1.88%, with technology, storage, and semiconductor sectors under pressure; South Korea’s benchmark index opened sharply lower by 6%, hitting its lowest level since July 31, with SK Hynix down over 7%; Bitcoin fell below $82,000 last night, touched a low of $80,200 today, and is currently trading at $81,100, down 3% over the past 24 hours.
Concerns about further Fed tightening have resurfaced: bets on a rate hike in October have risen, along with increased expectations for three additional hikes before the end of 2027. However, most traders still favor either "skipping October and December" or "one more hike this year." According to Polymarket data, the probability of a 25-basis-point rate hike in October remains at 23%, while the probability of holding rates steady is 77%.
Why is the probability of an October rate hike still uncertain?
Although the U.S. CPI for September exceeded market expectations, this does not mean the Fed will immediately resume rate hikes. Data from both Polymarket and CME FedWatch indicate that the market still largely expects the Fed to hold rates steady in October.
First, a significant portion of this round of inflation rebound stems from energy prices. In September, U.S. gasoline prices rose 9.1% month-over-month, accounting for more than half of the overall CPI increase for the month. For the Federal Reserve, energy prices are heavily influenced by international oil prices and geopolitical factors; if the rise is merely temporary, the Fed typically does not decide to further tighten monetary policy based solely on this factor, but instead places greater emphasis on whether core inflation continues to spread to other goods and services.
Secondly, the labor market has given the Fed room to hold off. Recent labor data has been weak: in September, non-farm payrolls increased by only 29,000, below market expectations, and the unemployment rate rose to 4.2%. If inflationary pressures rise while the labor market cools, the Fed will need to balance controlling prices with avoiding excessive economic slowdown, rather than immediately raising rates in response to a single inflation surprise.
In addition, previous statements by some Federal Reserve officials have left room for policy patience; New York Fed President Williams had previously expressed concern about risks in the labor market. For the Fed, continuing to monitor upcoming economic data before confirming the inflation trend remains a possible option.
Therefore, it is not difficult to understand the current market divergence: while a rebound in inflation increases the risk of rate hikes, temporary shocks in energy prices, a weakening labor market, and the Fed’s assessment of policy effectiveness all leave the possibility of an October rate hike uncertain.
What truly matters to the market is not a single interest rate hike by the Fed following an unexpected CPI reading, but whether inflation will remain persistently high and ultimately force the Fed to alter its predetermined path.
Finally, the pressure from today’s inflation data was not concentrated solely on energy but spread across multiple categories. Software prices rose 28% year-over-year, marking the largest increase on record; toy prices also saw record gains. Prices for housing, airfare, healthcare, and clothing increased as well. Economists were particularly surprised by the continued rise in housing costs, which climbed 0.40% month-over-month, pushing core inflation up by 0.15 percentage points—nearly half of the monthly increase.
Morningstar analyst Preston Caldwell said that although the market's reaction to monthly data may be somewhat exaggerated, the Federal Reserve's path back to price stability appears to be growing increasingly difficult.
Inflation may become a liability for Trump in the midterm elections.
For Trump, the troubles caused by this round of inflation rebound may go far beyond rising expectations of Fed rate hikes.
The data released by the U.S. Bureau of Labor Statistics marks the first increase in U.S. inflation since May, highlighting that the energy price shock triggered by the Middle East war continues to impact the United States. Following the outbreak of the war, gasoline and diesel prices surged before declining over the summer, but in recent months, as tensions escalated, fuel prices rose again, pushing diesel prices to record highs. Trump has been attempting to lower energy prices, but so far, the results have been less than effective.
More challenging is that rising energy prices are translating into political pressure. Gasoline prices directly affect American households' daily expenses, while diesel prices increase operating costs for industries such as agriculture and transportation, potentially further passing on to food and other consumer goods prices. For ordinary voters, macroeconomic data may seem abstract, but gas station price tags don't lie.
A October poll by Reuters and Ipsos found that approximately 78% of U.S. respondents believe Trump’s policies bear some responsibility for rising prices; another survey by the Associated Press and NORC showed that only 17% of U.S. adults approve of Trump’s handling of the cost-of-living issue, while 65% believe persistently high prices are more attributable to Trump’s policies than to factors beyond his control.
With the U.S. midterm elections approaching, control of Congress will be the central focus. Trump previously pledged to control inflation and reduce the cost of living as key political promises. However, if everyday expenses such as gasoline, diesel, and food continue to rise, voter dissatisfaction could translate into punitive votes against the Republican Party, especially in competitive key districts.
As inflation resurges and markets begin betting on rate hikes, while voters continue to wait in vain for the promised lower prices, energy costs are no longer just a macroeconomic issue—they could also become a political cost that the Republican Party must pay in the midterm elections.