U.S. September CPI heating up raises rate hike expectations; high interest rates continue to test the U.S. stock market rally.

U.S. September inflation heated up across the board, putting a big question mark over market expectations that the Federal Reserve will "hold steady" in October. Data released Wednesday by the U.S. Bureau of Labor Statistics showed that the September consumer price index (CPI) rose 0.6% month-on-month, higher than 0.4% in August; it rose 3.7% year-on-year, above the market expectation of 3.6%, with the previous reading at 3.4%the fastest increase in five months. Excluding volatile food and energy, core CPI rose 0.3% month-on-month, unchanged from the previous reading; it rose 2.6% year-on-year, above the expected 2.5%, with the previous reading at 2.4%. After the data was released, U.S. Treasury yields and rate hike expectations jumped in tandem. Inflation picture: Energy was only the fuse, while core inflation rose instead of falling The primary driver of September inflation was energy. Article One, citing Bureau of Labor Statistics data, said gasoline prices rose 9.1% month-on-month; U.S. Energy Information Administration (EIA) data showed gasoline rose 7.1%the former is the gasoline sub-index within CPI, while the latter is the retail gasoline price measure, with the two using different statistical sources. But what truly made the market nervous was that core inflation did not cool as expected. Core CPI rose year-on-year from 2.4% in August to 2.6%. Moreover, this round of price pressure was "quite broad," rather than limited to energy: prices for recreation, used cars and trucks, education, airfares, healthcare and apparel all rose across the board, "some of which may stem from tariffs and energy factors, but others point to sticky inflation." By component, healthcare services prices rose 0.3%; owners' equivalent rent (OER), the largest component of CPI, rose 0.3%; used car prices rose 0.7%, the largest increase since October 2025; grocery prices edged lower. An easily overlooked detail is the price pressure brought by data center construction: computer software and accessories prices rose 28.4% year-on-year, setting a record; computer, peripheral and smart home assistant prices rose 9.7% year-on-year, also a record. Artificial intelligence infrastructure investment is becoming one of the new sources of inflation. Inflation is also eroding households' real incomes. Another report showed that inflation-adjusted average hourly earnings fell year-on-year in September, the sixth consecutive month of decline. Several surveys this month showed consumer confidence deteriorating further and Trump's approval rating slipping. A Reuters/Ipsos poll showed about 78% of Americans blamed Trump's policies for rising prices, including tariffs and the U.S.-Israel war with Iran. This CPI was both the last before the November 3 midterm elections and relevant to the annual cost-of-living adjustment for tens of millions of Social Security recipientsthe Senior Citizens League forecast a 2027 COLA of 3.5%, higher than 2.8% in 2026. Market reaction: Long-end yields jumped, rate hike bets were repriced After the inflation data was released, the U.S. Treasury market reacted first. The 10-year U.S. Treasury yieldthe main benchmark for mortgage, auto loan and credit card ratesjumped 9 basis points to 5.304%; the 30-year Treasury yield, more sensitive to geopolitical events, rose 5 basis points to 5.61%. Even more dramatic was the repricing of rate hike expectations. According to the CME FedWatch tool, before the data was released the market priced about a 22% chance of a rate hike at the October 27-28 meeting. After the data came out, the probability of an October hike surged to more than 50%, and the 2-year U.S. Treasury yield was surging. Prediction market Kalshi's October probability "jumped from 21% to 33%." In addition, traders expect the Fed to raise rates three more times cumulatively by the end of 2027. The dollar and gold moved in tandem: The dollar index briefly rose about 30 points to 102.52, while spot gold briefly fell about $30 to $4,128.60 per ounce. Fed officials' remarks and policy: Divisions were already visible before the data release The weight of this data lies in its timingas Deutsche Bank analysts noted Wednesday, this CPI comes just two weeks before the Fed's next rate decision, "and since we will not get the PCE inflation data until the day after the next decision (that is the indicator the Fed officially watches), an surprise in either direction will help shape the narrative going into the next meeting." The policy backdrop is that the Fed last month raised the target range for the federal funds rate by 25 basis points to 3.75%-4.00%, the first hike since 2023, and hinted that further tightening was possible in the coming months. Before the data was released, officials' comments had already shown divisions. Before Wednesday's data release, Fed Governor Bowman said she did not see urgency for further action and favored first "waiting" to see how financial markets and the economy move; on Tuesday, New York Fed President Williams said one more hike this year would be appropriate, but no further hikes would be needed in 2027; Boston Fed President Collins said further rate hikes may still be needed before year-end to curb inflation, but when to act depends on future data. In addition, analysis noted that the latest officials' remarks after the September hike did not pave the way for consecutive hikes in October, but this stronger-than-expected core inflation report "almost confirmed that September was by no means a one-off action." Implications for the Fed's future rate hike outlook The "signals" from this CPI can be understood on three levels. First, September was by no means a "one-off action." Before the data was released, the market had at one point weakened its bets on another hike this year because September nonfarm payrolls rose by only about 29,000 (with the unemployment rate rising to 4.2%) and July and August PCE came in below expectations; after the data was released, an October hike came back into view. Second, the center of gravity of the path remains on December. Before the data was released, the path priced by the market was roughly "hold steady in October, raise by 25 basis points in December, and then hike twice more by the end of 2027"; the probability of standing pat in October had at one point exceeded 78%, while the probability of a December hike was close to 88%. After this CPI, the divergence between October and December was reactivated, but as long as subsequent data does not deteriorate further, December remains the more likely timing. Third, the absence of official guidance gives the data greater weight. Fed Chair Kevin Warsh has tended to avoid providing clear forward guidance to the market since taking office; he will hold a fireside chat with IMF Managing Director Georgieva on Friday (Beijing time 11:30) during the IMF annual meetings in Bangkok, which will also be his last public appearance before the Fed enters its blackout period (this meeting's blackout period begins Saturday). His remarks at the September decision press conference were: "Inflation is too high, and it has been too high for too long." Wall Street analysts and expert commentary On whether the Fed will hike in October, Wall Street's divisions were magnified by this data. Natixis' Christopher Hodge said bluntly that the data put October back on the table: "We had said that any data close to consensus was unlikely to change the Fed's narrative for October, but this deviation is large enough to make it a debate. We still think the Fed ultimately will not actthe arguments laid out by Williams and Jefferson suggest there is no rush to tighten again right now, but at least today gave the hawks more ammunition at the meeting." Some analysis noted that the data showed price pressure was "quite broad," "some of which points to sticky inflation. And that is exactly what Warsh and his colleagues fear mostyou cannot just 'look away' from it!" TD Securities U.S. rates strategist Molly Brooks had earlier flagged the asymmetry of the risks: "The risk from this CPI report is not symmetric. An inflation reading above expectations could mean the Fed needs to accelerate the pace of monetary tightening." Goldman Sachs, meanwhile, offered a relatively optimistic path based on component trends: it expects continued cooling in housing costs and a diminishing tariff impact to help slow the month-on-month increase in core CPI further to about 0.1% in November and December; at the same time, it warned that energy, materials and some skilled labor demand brought by AI infrastructure investment constitute medium-term variables that need continued monitoring. What is the impact on U.S. stocks? For U.S. stocks, this CPI directly pressures valuations through "higher-for-longer rates." After the data was released, as of publication, the Nasdaq opened down 0.4%, the S&P 500 fell 0.27%, and the Dow rose 0.28%. In early U.S. trading, tech stocks fell collectively: SK Hynix, AMD and SanDisk dropped 3%, Intel and Oracle fell 2%, and Nvidia, Micron Technology and Qualcomm fell more than 1%. The logic chain is clear: long-end yields jump discount rates rise rate-sensitive growth stocks and AI hardware stocks come under pressure. What is special this time is that AI itself is both a high-valuation sector and one of the drivers of this round of inflation (computer software and accessories prices posted a record year-on-year increase), forming a self-reinforcing negative feedback loop: "AI capital expenditure pushes inflation higher, inflation pushes rates higher, and rates suppress AI valuations." Goldman Sachs' judgment before the data release still applies: if core inflation unexpectedly accelerates and yields rise again, it could increase adjustment pressure on high-valuation sectors; the subsequent trend will ultimately still need support from corporate earnings and guidanceThursday's PPI, retail sales and initial jobless claims data, as well as Warsh's speech on Friday, will be the next key observation window.