Within 24 hours, market sentiment changed completely. On Monday, Wall Street had its best day since April. The S&P 500 rose 2.4% and the Nasdaq 100 gained 3.4%. Everyone was smiling. But on Tuesday, inflation data came out. It was just 0.1 percentage points above expectations. And that was enough to send the Nasdaq back into negative territory. As if that wasn't enough, just hours earlier, a Fed official had said that in such a scenario, the Fed should consider a larger interest rate hike.
OCTOBER INFLATION
Let's start with the numbers. Headline CPI inflation rose 0.4% in October compared with the previous month. Analysts had expected 0.3%. Core inflation also rose 0.3%, against expectations of 0.2%.
"Core inflation? What's that?" you might be wondering. Put simply, it's inflation excluding food and energy. These two categories tend to experience significant fluctuations, so economists remove them to get a clearer picture of the underlying price trend. And this is the measure the Fed watches very closely.
And here's the problem. This is the third consecutive month in which core inflation has come in at 0.3% or higher. In other words, this isn't just a bad month. It's becoming a trend.
So, what became more expensive? Gasoline, which is still 37.4% more expensive than it was a year ago. Yes, you read that correctly. Food prices rose 0.5% in a single month, both at grocery stores and restaurants. Car insurance premiums increased 0.7%, while transportation costs rose 0.8%. In fact, the only notable exception was used cars, which fell 1.2%.
And there's something else worth mentioning. Real wages, meaning wages adjusted for inflation, remained unchanged. In other words, Americans saw no improvement in their purchasing power.
WALLER AND THE 50 BASIS POINT HIKE
And this is where Christopher Waller of the Federal Reserve enters the picture. Just hours before the data was released, during a speech in London, he said he supported a 0.25 percentage point interest rate hike in December. But he added one condition. If core inflation came in around 0.3% or higher, the Fed should consider a 0.50 percentage point increase.
And core inflation came in at... exactly 0.3%.
Waller went even further. He said that if the Fed raises interest rates by just 0.25 percentage points, it would risk damaging its credibility. And that's a risk he isn't willing to take.
"Wait, interest rate hikes? Weren't we expecting cuts?" you might be asking. We were. But the situation has changed completely. Interest rates currently stand at 3.75% to 4.00%, following September's increase. And back in October, when the Fed decided to keep rates unchanged, two members had already voted in favor of another hike.
And what about the markets? According to CME FedWatch, the probability of an interest rate hike in December is now 100%. Markets are pricing in an 85.3% probability of a 0.25 percentage point increase and a 14.7% probability of a half-point hike.
In other words, the question is no longer WHETHER the Fed will raise interest rates. It's HOW MUCH.
THE FED IS MAKING DECISIONS WITH ITS EYES HALF-CLOSED
And this is where things get even more interesting. Notice something? In everything we've discussed so far, we haven't mentioned the annual inflation rate. The most widely followed inflation figure of all.
"How is that possible?" you might be wondering.
Remember the US government shutdown in October 2025? At the time, the Bureau of Labor Statistics stopped collecting price data. That means there is no October 2025 figure available to compare with October 2026. As a result, neither the headline nor the core annual inflation rate was released this month.
The latest figures we have are from September, when headline inflation stood at 3.7% and core inflation at 2.6%.
But that's not all. The annual inflation figures will return with the November data, scheduled for December 10. The Fed, however, is due to make its interest rate decision on December 9. That's ONE DAY EARLIER.
In other words, the Fed will make one of the most important decisions of the year without having seen the latest annual inflation figures.
HOW THE MARKETS REACTED
The first reaction came from the bond market. The yield on the US 2-year Treasury jumped by 0.17 percentage points, closing at 4.74%. The 2-year Treasury is particularly sensitive to expectations about the Fed's monetary policy. So when it moves this sharply, we know the market has significantly changed its expectations. The 10-year Treasury yield also reached 5%.
As for stocks, the Nasdaq closed down 0.74%, while the S&P 500 fell 0.38%. All major indices ended the session in negative territory, with the Dow Jones also declining 0.30%. Bitcoin dropped 1.43%, to $73,858.
There was, however, some good news. Oil prices closed lower once again after Trump said that the war with Iran was practically over.
You might ask: if oil prices are falling, why isn't inflation coming down as well?
Because gasoline is still significantly more expensive than it was a year ago. And that is still showing up in the inflation data.