inflation

Inflation came in hotter than expected. But is this still an oil story?

Orphe Divounguy

Orphe Divounguy

— 4 min read
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Inflation came in hotter than expected. But is this still an oil story?

Key Takeaways

  • Hotter than expected. Consumer prices rose 0.4% and core prices 0.3% in October, both above expectations; core has now risen 0.3% for three straight months.
  • Energy is cooling, but other prices aren’t. Energy and gasoline inflation slowed sharply, while food, transportation services, and motor vehicle insurance picked up.
  • Not all of it is oil. Higher energy costs can keep passing through even as oil falls, but increases in core categories like vehicle insurance can’t automatically be blamed on oil.
  • A December hike looks highly likely. The open questions are whether it’s 25 or 50 basis points and how much more tightening follows in 2027.

Consumer prices rose 0.4% in October, above the 0.3% expected, but down from September’s 0.6%. Core inflation (excluding food and energy) rose 0.3%, above the 0.2% expected, for the third consecutive month.

What’s driving inflation?

  • Energy is cooling: Energy prices rose 0.7%, down from 5.2% in September. Gasoline inflation slowed from 9.1% to 1.0%. Oil prices have since retreated from their late-October highs.
  • Food is heating up: Grocery prices rose 0.4%, reversing September’s 0.1% decline. Restaurant prices increased 0.5%, up from 0.2%.
  • Services remain sticky: Transportation services rose 0.8%, accelerating from 0.6% in September, even as airfares slowed from 1.2% to 0.4%. Motor vehicle insurance rose 0.7%. Shelter inflation eased to 0.3% from 0.4%, but still accounted for more than 30% of the overall monthly increase.
  • Some relief: Used vehicle prices fell 1.2%, reversing September’s 0.7% increase. Apparel inflation slowed to 0.1% from 0.3%.

Some of this is what we’d expect following an oil-price shock. But not all of it.

Higher energy costs work their way through transportation, production, and distribution before reaching consumers. That pass-through can continue even after oil prices begin falling. Diesel prices may also remain elevated longer than crude oil prices because of refining constraints, prolonging pressure on transportation costs.

But increases in vehicle insurance and other core categories cannot automatically be attributed to oil. They may reflect additional cost pressures.

Federal Reserve research published yesterday finds that oil-price increases now pass through more strongly to core inflation. But it also finds that core inflation has become more persistent since the pandemic. The study covers five advanced economies, including the U.S., and its estimates illustrate upside risks rather than forecast the current shock.

A temporary oil shock should eventually stop adding to inflation. The concern is whether its effects become embedded in broader pricing behavior.

Should the Fed hike in December? Yes. The case was already strong before today’s CPI report.

Core prices have now risen 0.3% for three consecutive months, an annualized pace of roughly 3.7%. The labor market has also stabilized, with unemployment falling to 4.1% and employers adding 165,000 jobs in October.

But the case for a larger hike deserves attention. Fed Governor Christopher Waller said today that another core CPI increase around 0.3% could warrant considering a 50-basis-point hike (0.50 percentage point). His concern is the breadth of price increases, particularly across core goods and services whose prices are directly observed in the marketplace, excluding housing.

So what are inflation expectations telling us?

  • Markets: The 5-year breakeven inflation rate fell from 2.39% on November 3 to 2.25% on November 9, while the 10-year declined from 2.30% to 2.22%. Breakevens measure inflation compensation priced into Treasury bonds, including inflation-risk and liquidity premiums. Falling expected energy inflation may explain part of the decline.
  • Consumers (University of Michigan, preliminary): One-year inflation expectations declined from 4.7% in October to 4.3% in November. Long-run expectations eased from 3.5% to 3.4%.
  • Consumers (New York Fed): One-year expectations held steady at 3.9% in October, while expected gasoline-price inflation fell 0.6 percentage point to 4.2%.

Inflation expectations remain elevated, particularly among consumers. But the latest readings are not showing further upward movement.

A December rate hike looks highly likely. Whether the Fed raises rates by 25 or 50 basis points—and how much additional tightening follows in 2027—depends on whether inflation pressures continue spreading beyond energy, whether those pressures persist as oil prices fall, and whether inflation expectations begin rising again.

Sources: BLS October CPI, Federal Reserve oil-price research, Waller speech, FRED 5-year and 10-year breakevens, University of Michigan, New York Fed.

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