US CPI and PPI: could inflation surprise a hawkish market?

Two major inflation releases

US inflation data could set the direction for markets this week, with September consumer prices due on Wednesday 14 October and producer prices on Thursday 15 October. Both releases are scheduled for 1.30pm UK time. They arrive as interest-rate expectations rise again and US equities trade close to record highs.

Consensus forecasts cited in the 13 October analysis point to headline CPI rising from 3.4% to 3.7% year on year and core CPI increasing from 2.4% to 2.5%. For the producer price index (PPI), headline inflation is expected to remain at 5.4%, while the core rate is forecast to ease from 4.6% to 4.4%.

Inflation pressures keep rate expectations elevated

Recent indicators suggest that inflationary pressures remain persistent. The prices components of the ISM surveys have picked up, while inflation expectations have also risen.

Against this backdrop, the minutes of the latest Federal Open Market Committee meeting indicate a willingness to tighten monetary policy further. As of 13 October, fed funds futures priced in a 19.8% probability of an October rate rise and a 99.6% probability of a further increase by the end of December, alongside two additional increases during 2027.

However, the Federal Reserve's own projections are considerably less hawkish than market pricing. The latest dot plot points to interest rates of 4.1% in 2027 and 3.9% in 2028, compared with futures-implied levels of approximately 4.7% and 4.9%. This divergence increases the market's sensitivity to inflation surprises.

Fed funds rate expectations and ISM price and activity indicators

Source: TradingView, 13 October 2026

A hawkish outlook despite a cooling labour market

The tightening priced into markets contrasts with the latest employment report. The US added just 29,000 jobs, unemployment rose to 4.2%, and annual growth in average hourly earnings slowed to 3.0%, its lowest rate since May 2021.

Weak hiring and moderating wage pressures offer less support for a prolonged cycle of interest-rate increases, particularly if the slowdown in employment continues.

Effective fed funds rate, wage growth and employment growth

Source: TradingView, 13 October 2026

An asymmetric risk for rates, the dollar and equities

Markets approach the releases positioned for persistent inflation and further rate rises, making the potential surprise asymmetric.

Inflation above expectations would be needed to reinforce the current combination of rising rates and a strong US dollar. Such an outcome could bring the next rate increase forward to October and add pressure to equities.

Conversely, inflation in line with or below expectations could challenge some of the tightening already priced in. The Fed would have more scope to wait until December, potentially allowing yields to ease and bond prices to recover. Equities could also benefit, with the S&P 500 seeking to consolidate a breakout above its previous record highs.