CPI data strengthens expectations of interest rate cuts, economists warn that inflation may return. The yield on 10-year US Treasury bonds may rise to 6%.

The US stock market surged on Friday and hit a new all-time high, as the September Consumer Price Index (CPI) came in lower than expected, providing more reasons for the Fed to continue cutting interest rates next week and in December. However, some economists warn that inflation may rebound in the months ahead, and caution against being complacent. Steven Blitz, Managing Director and Chief US Economist at GlobalData TS Lombard, pointed out that inflation could still be transmitted to the real economy through the banking system in the future, making it "tricky" once again. He even believes that this process could raise the current approximately 4% yield on the US 10-year Treasury bond to 6% or higher over the next one to two years. Following the slower-than-expected growth in the September CPI, the Dow Jones, S&P 500, and Nasdaq all closed at historic highs. The Dow closed above 47,000 points, marking its 13th historical high this year, while the S&P 500 and Nasdaq recorded their 34th and 33rd historical highs of 2025, respectively. Eric Sterner, Chief Investment Officer at Apollon Wealth Management, stated that various indicators of inflation, including rents, are showing signs of "deflation," but acknowledged that inflation is "sticky" and would take time to return to the 2% target. Meanwhile, US bond yields were mixed, with the 3-year Treasury yield falling to 3.49%, significantly below the effective federal funds rate of about 4.11%. Interest rate futures indicate a probability of a total of 4 to 5 rate cuts of 25 basis points each from now until mid-2026. Blitz believes that in the short term, the economy is weaker than the market imagines and inflation will continue to fall, so the Fed will continue to cut rates, but probably not by four or five times. He emphasized that he is focusing on the inflation path after this year. Once the 3-year U.S. Treasury yield rises above short-term policy rates, causing the yield curve to return to a positive slope, banks releasing credit will trigger a renewal of loan expansion. This scenario may occur in the summer of next year or even earlier. In Blitz's logic, as the short end of the curve turns positive, it will strengthen banks' willingness to expand loans, driving leverage spending by businesses and residents, and supporting sectors such as housing. He also added that persistent fiscal deficits, government spending expansions, and constraints on low-cost imports resulting from the global trade structure may all contribute to pushing long-term interest rates up and bringing medium-to-long-term inflation back up. In a report released on Friday, Blitz pointed out that if the short end of the curve turns positive, fiscal stimulus and tax incentives combine, credit expansion will have inflationary power. Therefore, while it may not happen in a matter of weeks, the 10-year yield is "trending upward in the long run," and could reach 6% or higher in the next 1 to 2 years. Concerns about a resurgence of medium-to-long-term inflation pressure are not unique to Blitz. John Luke Tyner, an investment manager at Aptus Capital Advisors, also pointed out that the lagging effects of Fed rate cuts and the possibility of tapering ending in late 2025 (quantitative tightening ending, equivalent to an additional rate cut) could bring risks of accelerating inflation. He stated that a rebound in bank lending, as well as rising demand for mortgages and refinancing, along with the fiscal stimulus of the "Build Back Better Act" introduced by Trump, could reignite inflation.