Falling gasoline prices provided some relief to consumers in October, but Federal Reserve officials are increasingly concerned that inflation pressures elsewhere in the economy are proving harder to contain.
Prices at the pump declined by more than 4%, according to the Energy Information Administration, providing a respite from a surge that had added more than a dollar a gallon over the past year.
However, the consumer price index for the month, which the Bureau of Labor Statistics will release Tuesday at 8:30 a.m., is expected to show only a slight let-up.
Meanwhile, Fed officials say they are worried that inflation initially driven higher by President Donald Trump 's tariffs and the Iran war is proving more persistent than expected, with price pressures emerging in sectors beyond those directly affected by the shocks.
At a time when the central bank is increasingly confident about the state of the labor market, concerns over the cost of living are what are top of mind for the Fed.
"We've been moving up to what historically we'd consider full employment, and the big problem has all been on the inflation side. We go around, we talk to people everywhere in this district, all we hear about is affordability on the business side, the cost," Chicago Fed President Austan Goolsbee said Monday during an event in his home district. "So we've got to come to terms with this cost-side and inflation-side failure."
The CPI reading for all items is expected to show an increase of 0.3%. Core inflation, which excludes volatile food and energy costs, is forecast to increase 0.2%, according to the Dow Jones consensus forecast. While both would be slower than the respective September monthly gains of 0.6% and 0.3%, they still represent further price pressures.
There will be no annual reading for October because of the government shutdown a year ago, which prevented the BLS from collecting some data and compiling a full index level. Because of the data issue, there isn't a comparable figure for the index.
Bank of America, using an assumed baseline interpolating data for the period last year, estimated the annual growth rates at 3.8% for headline and 2.7% for core, both 0.1 percentage point higher than September and well above the Fed's 2% goal.
Goolsbee said the current run on inflation is defying what normally could be expected from supply shocks and tariffs, with the current situation intensified by the hyperscaler build-out related to artificial intelligence.
"It was supposed to have gone away by now, and we're now starting to see the inflation kicking up in areas that probably weren't from oil prices and tariffs, like a bunch of services. Now this stuff with the AI data center build-out is, to my eyes, starting to look more just like old-fashioned demand overheating," he said.
The massive investment in data centers is creating demand for construction workers, electricity and equipment, potentially adding to price pressures even as AI promises longer-term productivity gains, he added.
Though the Fed in October voted to hold its benchmark interest rate in place, markets are pricing in a better than 80% probability that the central bank will raise rates by a quarter percentage point at its next meeting in December, according to CME FedWatch data.
Goolsbee, who doesn't vote on the rate-setting Federal Open Market Committee this year but will in 2027, didn't commit to which way he was leaning on additional rate hikes, though he said current conditions could warrant action.
"The conventional wisdom there is: Be aggressive up front, to never let the economy overheat, because once it gets overheated, it's extremely painful to get rid of that kind of overheating," he said. "So I think we've got to watch out in that space."
The CPI release comes with economic growth strong — 3.4% in the third quarter for gross domestic product and tracking at 3.5% for the final three months of the year, according to the Atlanta Fed — and the labor market seemingly in solid shape as well. Nonfarm payrolls expanded by a much better-than-expected 165,000 in October, while the unemployment rate edged lower to 4.1%, though inflation-adjusted wage growth has been negative.
That puts the inflation reading squarely in focus.
Bank of America said it sees tariff impacts fading but that goods prices could be pushed higher because of AI demand. Further, the firm is cautious about "sticky" services prices as well as pressures from health insurance and autos.
The bank has been hawkish in terms of Fed expectations and sees a December hike as likely so long as there isn't an escalated stock market sell-off that might dissuade the central bank.
"This will be the final inflation report before the Fed's December 8-9 meeting. If our forecast is correct, we think it would effectively lock in another 25bp hike, all else equal," BofA economist Stephen Juneau said in a client note. "Absent an indisputably soft 0.1% [month-over-month] print, we doubt the inflation data will dissuade the Fed from hiking in December. The bigger risk to our call comes from financial markets."
