October CPI year-on-year could not be published because comparable statistics from the same period in 2025 are missing, and our model estimates the October annual rate at roughly 4.0%.

On a month-on-month basis, headline CPI rose 0.35% and core CPI rose 0.296%, both above market expectations.

Two factors drove the CPI shock against market expectations: first, before the release, most estimates based on high-frequency data projected a slowdown in monthly CPI, and second, Federal Reserve Governor Waller issued hawkish guidance, saying he would be open to a 50bp hike in December if core CPI month-on-month stays at 0.3% or higher.

CPI once again coming in above expectations has raised market concerns over whether inflation is facing more broad-based pressure.

The main drivers of the upside surprise in October included a sharp jump in energy services month-on-month, higher oil prices lifting transportation services, and an unexpected rise in food items, while shelter costs, core goods, and other core services held broadly steady for now.

The breadth of price increases across CPI categories has not widened significantly, and the key factor behind the elevated monthly gain remains energy, with related items highly likely to moderate in November.

Overall, the upside-surprise October CPI does not mean the Fed needs to "catch up" with a 50bp hike in December, and 25bp hikes in December and each quarter of 2027 remain our baseline assumption.

Our model (rather than official data) estimates the non-seasonally adjusted CPI year-on-year growth rate at 4.0% (previous 3.7%), and fourth-quarter inflation will likely stay above 4% due to missing 2025 sampling and a low base.

On a seasonally adjusted monthly basis, headline CPI slowed slightly to 0.35% from 0.396%, while core CPI eased to 0.296% from 0.335%, but both remain above market expectations.

It is also worth noting that the non-seasonally adjusted October CPI monthly gain was only 0.2%, indicating a clear seasonal adjustment effect.

Core goods rose 0.16% month-on-month (previous 0.251%), while core services excluding shelter but including energy rose 0.451% (previous 0.305%).

By comparison, the Cleveland Fed's trimmed-mean CPI rose 2.8% year-on-year (previous 2.66%), also pointing to a marginal pickup in inflation momentum, though price pressure remains limited.

CPI has exceeded expectations for two consecutive months, but the main inflationary momentum still comes from energy, core goods have not shown accelerating price momentum, and the stronger parts of core services are mainly tied to energy items.

At present, inflation pressure still stems mainly from the supply side rather than the demand side.

One of Governor Waller's main arguments for a hike is concern that even if oil futures retreat, prices such as diesel will be sticky in the short term, requiring a withdrawal of easing to control inflation expectations.

However, based on the current price structure, we do not believe a single 50bp hike in December is necessary; with oil prices falling significantly in November, the Fed maintaining gradual hikes should be enough to control inflation, and financial conditions have already tightened somewhat after the September hike.

1. Oil prices still rose sharply month-on-month in October and, combined with the rebound in natural gas prices, kept monthly inflation elevated, but November should see clear moderation; energy-related items contributed about 30% of the monthly gain.

Although monthly gains in fuel oil and gasoline were limited in October, transportation services prices rose further, reflecting worsening energy cost issues; in addition, electricity within energy services rose 0.9% month-on-month, also lifting inflation.

Both WTI and Brent crude prices fell significantly in November, which is conducive to a renewed slowdown in related items month-on-month.

2. The biggest upside surprise in October was food prices, whose monthly gain jumped to 0.5% from zero growth, but there is no evidence yet that the sharp food price increase will persist.

In October, both food at home and food away from home saw notable price gains, with broad increases in meat products, fruits and vegetables, and grains, making it hard to confirm whether this was caused by high energy prices feeding into shelter costs; it is most likely a short-term issue, but in 2027 we need to watch for El Niño raising some food costs.

3. Shelter costs stabilized month-on-month in October, and the downward trend in leading indicators remains unchanged, but lodging away from home saw price increases.

Its seasonally adjusted monthly gain was 0.3%, and the non-seasonally adjusted gain was about 0.2%, with primary residence and owners' equivalent rent staying stable and showing no signs of acceleration.

In addition, market home prices, rents, and sales remain weakening, and long-term mortgage rates near 7% do not support a rebound in shelter costs that significantly lag the market.

However, shelter costs also include lodging away from home, which rose 0.6% in October after a 2% gain in September, though its pressure on overall shelter costs is limited.

4. Core goods fell month-on-month in October, with used cars declining noticeably and apparel weakening again, and the trend of a mild slowdown in core goods year-on-year growth has not yet been broken.

Judging from market coincident indicators for used cars, there is still no trend of sustained price increases, and new car price growth is relatively moderate.

Apparel and tobacco products, which had seen larger price increases earlier, have slowed, with overall pressure not significant.

AI hardware price increases month-on-month have not accelerated.

From the perspective of tariff base effects, core goods year-on-year growth still has room to move lower unless a new large-scale trade friction emerges.

5. Pressure in core services mainly comes from transportation services tied to oil prices and from leisure services, but overall price increases still lack continuity.

The seasonally adjusted monthly rise in services excluding shelter mainly came from energy services, transportation services, and leisure services.

Education and communication services, personal care services, and medical services overall saw limited gains, while miscellaneous items continued to moderate.

At present, the stronger core services inflation in October cannot be explained as AI driving demand or a full spillover of energy effects.

The stronger October labor data and CPI do not mean a 50bp hike is needed in December.

Although labor data show a bottoming-out recovery trend, October's strength is likely cross-month volatility; on inflation, price pressure overall comes from the supply side, and the pass-through from oil prices to non-oil-related items is not obvious.

Warsh also believes that although financial conditions are not yet tight enough, some tightening has appeared after the September hike.

At present, the Fed is not significantly behind the curve on inflation, and the necessity of a single 50bp hike is limited.

The key reason the market suddenly began considering a 50bp hike in December is that before the CPI release, Governor Waller gave his own forward guidance: if October core CPI month-on-month is 0.3% or higher, he is open to a 50bp hike.

Other Fed officials speaking the same day also signaled hawkish rate hikes.

We tend to think that with inflation temporarily running above expectations for consecutive months, putting a 50bp hike within the Fed's discussion range is reasonable, but this does not mean a single 50bp hike is truly necessary.

After the CPI release, Waller also said he is not "super hawkish" and does not want to severely damage the US economy through extreme rate hikes.

We understand Waller's focus as taking back the 75bp of precautionary cuts in 2025, but that does not mean the remaining 50bp must be withdrawn entirely in December.

From a historical perspective, when the Fed's first 50bp hike of 2022 occurred, CPI year-on-year was above 8%, core CPI was above 6%, the impact of the Russia-Ukraine war was still uncertain, and the federal funds rate was still in the 0.25%-0.5% range, significantly behind the curve and far from restrictive.

In addition, the US economy was overheating, with fiscal and monetary stimulus pushing wage growth into the 5%-6% range, monthly nonfarm payroll gains consistently above 300,000, and real consumption far exceeding its normal trend.

Currently, this oil-driven CPI peak is highly unlikely to exceed 4.3%, and after a December hike the upper bound of the federal funds rate will reach 4.25%, with the 10-year Treasury yield again approaching 5% and the 2-year steadily above 4.5%, meaning rates are relatively sufficiently restrictive for inflation.

Moreover, US real consumption and employment are both far weaker than in 2022, and loosening AI narratives are an additional risk, so the Fed has no urgency for a single 50bp hike.

Market inflation expectations are stable and edged lower in November, also suggesting no need for aggressive hikes: the November University of Michigan consumer inflation expectation survey (MSC) showed 1-year inflation expectations falling to 4.3% from 4.7%, and 5-year inflation expectations slightly lower at 3.4%.

Investor-priced breakeven inflation expectations continued to stabilize near the inflation target in November: the 10-year breakeven inflation rate edged down to 2.25%, and the 5-year expectation fell to 2.3%.

The sharp rebound in long-end Treasury yields is still mainly pricing rate hike expectations rather than pricing a sustained large deviation of inflation from target.

The November drop in oil prices should have driven a small decline in inflation expectations, and the Fed can maintain its current pace of hikes, but there is no sufficient reason to suddenly accelerate hikes in December.

On AI, although related goods lack year-on-year data, month-on-month gains have slowed, and AI investment still has not driven an obvious price increase.

In the October data, the commodity category most strongly tied to AI was information technology products, which rose 0.22% month-on-month (previous 0.62%); among them, computers, peripherals, and smart home assistants rose 0.55% (previous 1.39%), and computer software and accessories including storage drives fell 1.53% month-on-month (previous 0.37%).

On the services side, wireless telephone services, which may include AI subscriptions, fell 0.17% month-on-month (previous -0.06%).

Overall, price increases for AI-related goods and services slowed again in October, with some items turning negative.

Although official year-on-year data are unavailable, AI-related goods and services are highly likely still in deflation year-on-year.

Therefore, it cannot be said that AI capital expenditure has already spread into consumer prices, and the key to short-term inflation pressure remains energy.

Looking at CPI components:

Food prices: food at home rose 0.5% month-on-month, food away from home rose to 0.4%, and food overall rose 0.5%.

Among the six food sub-indices, four categories rose in October and one fell.

Meats, poultry, fish, and eggs rose 0.5% month-on-month, the fruits and vegetables index and the dairy and related products index both rose 0.6% in October, and the nonalcoholic beverages index fell 0.3% in October after rising 0.9% in September.

The cereals and bakery products index was flat this month.

Within food away from home, the food away from home index rose 0.5% in October, and the full-service meals index rose 0.7%.

Judging from leading indicators, food price growth will not accelerate significantly during the year.

However, we need to watch for El Niño pushing up some affected food prices and creating additional inflation pressure in 2027.

Energy prices: the October energy index rose 0.7% month-on-month on a seasonally adjusted basis, clearly moderating from September; the October natural gas index rose 0.6% month-on-month, and the electricity index rose 0.9%.

WTI crude oil will fall month-on-month in November, easing the monthly pressure on key items in November.

Core goods: October core goods rose 0.2% month-on-month on a seasonally adjusted basis (previous 0.3%), with used cars and apparel, which had risen last month, both falling back.

Among them, apparel rose 0.1% month-on-month, new vehicles rose 0.2%, used cars fell 1.2%, continuing the overall decline, medical care commodities rose 0.5% (Trump RX lowered drug prices in previous months, creating a low base), and tobacco and related products rose 0.3% (previous 0.7%).

Considering household income and tariffs, core goods price growth may still have room to slow, consistent with lower tariff revenue since February and price declines in tariff-sensitive items within core goods details.

Shelter costs: from leading rent and home price indices, it is not hard to see that with the property market overall remaining subdued due to high rates, shelter costs should continue to be part of the process pulling CPI lower; even without considering shelter's lag, current rents and home prices show no momentum for an overall rise.

Therefore, October shelter costs roughly stabilized, and the main thing to watch going forward is whether price increases re-emerge in 2027 after the lag effect in shelter costs ends; if increases persist, it will become harder for inflation to move toward 2% in 2027.

October shelter costs rose 0.3% month-on-month, with primary residence rent holding at 0.2% on a seasonally adjusted basis and owners' equivalent rent (OER) holding at 0.3%, while upward pressure came mainly from the lodging away from home index rising 0.6%.

Core services: price increases mainly came from transportation services and leisure services.

Medical care services held at 0.3% month-on-month, although medical-related services price increases accelerated slightly; transportation services rose to 0.8% month-on-month, still due to higher oil prices, with motor vehicle insurance up 0.7% month-on-month and public transportation up 2.0%.

Leisure services unexpectedly jumped to 0.9% month-on-month, with audio recording and pet services up 0.5% month-on-month, ending negative growth, and other leisure and entertainment up 1.1% month-on-month; it is not yet possible to confirm that leisure services price increases are sustainable.

Education and communication held at zero growth month-on-month, personal care rose 0.2% month-on-month, and miscellaneous items fell 0.1%.

Overall, apart from transportation tied to oil prices, the rest of services price increases have not shown sustainability, and it cannot yet be proven that non-oil inflation pressure is spreading broadly.

The CPI upside surprise pressured the rebound in AI equity assets, while the bond market aggressively priced the possibility of an above-expected hike: before the CPI release, Governor Waller's discussion of a 50bp hike had already driven a significant rebound in hike pricing and Treasury yields, and CPI intensified this.

After the CPI release, CME federal funds rate futures priced a 25bp hike in December and two more 25bp hikes in 2027, with a small probability (around 9%) also priced for a 50bp hike in December.

Treasury yields surged, with the 10-year up 10.97bp to 4.994% and the 2-year up 18.04bp to 4.738%, repricing expectations for three more hikes since September.

US stocks opened lower and all three major indices closed down, with the Philadelphia Semiconductor Index falling 0.35%, disturbing the rebound trend, which needs to be monitored.

The dollar index rebounded to 102.2463, and London gold fell 2.61% to $4,032.031 per ounce.

With Treasuries having priced in rate hikes relatively fully and their property of absorbing equity market safe-haven funds temporarily restored, we believe the allocation value of Treasuries persists, though a trend decline in short-term trading yields will still be difficult.

1. CPI breakdown, forecast, and components

2. Risk warnings

(1) The risk of a decline in US aggregate demand.

(2) The risk of an unexpected major adjustment to the Trump administration's tariff policy.

(3) The risk of energy prices remaining elevated for a long period.