Will the Federal Reserve raise rates in December? Tonight's CPI will be the final verdict!

The October CPI data to be released tonight will serve as a key basis for the Federal Reserve's final rate hike decision of the year. Against the backdrop of robust employment data already opening the door to a hawkish stance, the direction of inflation data will directly determine whether Fed Chair Warsh will pull the trigger on a rate hike on December 9th.

The market is currently pricing in an 86% probability of a rate hike in December. Last Friday, non-farm payrolls significantly exceeded expectations, with an increase of 165,000, far surpassing the market forecast of 70,000. The unemployment rate fell to 4.1%, and the labor market has provided substantial support for the hawks. The last FOMC meeting ended with a 10-2 vote to keep rates unchanged, but officials Cook and Hammack clearly voted in favor of a hike, indicating emerging internal divisions. As a result, inflation data has become the decisive variable.

Goldman Sachs forecasts October core CPI to rise by only 0.16% month-on-month, well below the market consensus of 0.20%; UBS projects 0.23%; JPMorgan economist Mike Feroli also forecasts 0.23%.

The divergence among institutions is obvious, and tonight's data is expected to trigger significant market volatility—in fact, according to Goldman Sachs trading division, the implied intraday range for the S&P 500 is about 80 basis points, with contract values around $60. Notably, due to last year's government shutdown, the BLS did not collect October data, so the year-over-year rate cannot be calculated; hence, market trading will focus on the core CPI month-on-month figure rounded to two decimal places.

Goldman Sachs expects core CPI for the month to drop sharply from September’s 0.33%, primarily driven by three components.

For airline tickets, Goldman Sachs’ tracked online fares show a flat month-on-month figure for October. Due to a sharp rise in jet fuel prices, airline ticket prices rose by an average of 2.5% per month over the first nine months of this year, but this upward trend stalled abruptly this month.

With health insurance, the BLS will incorporate a semiannual update of insurer source data in the October report. Goldman Sachs predicts this update will lead to a 2.5% decline in health insurance prices, and that negative value will persist for six months until the next reset in April next year. This will cause the overall price of medical services to fall by 0.1%; medical services account for about 9% of the core CPI, making the impact significant.

It’s worth noting that this component uses different source data than PCE, so this downward effect will not transmit to the Fed’s preferred core PCE index.

For the auto sector, Goldman Sachs projects used car prices to drop by 1.5% (based on auction data), new car prices to rise by 0.1%, and auto insurance prices to fall by 0.3%. With an estimated 3% weighting, used cars alone could drag down core CPI by about 4.5 basis points.

A technical factor adds further complexity to interpreting this data.

Because last year’s government shutdown prevented the BLS from collecting October 2025 price data, seasonal adjustment factors had to be recalculated. The BLS used the geometric mean of the September and November 2025 indexes to fill the gap, which inadvertently lowered this month's seasonal adjustment benchmark.

Goldman Sachs estimates that this statistical distortion will artificially boost the seasonally adjusted core CPI month-on-month reading for this October by about 5 basis points, with the most pronounced impact seen in categories such as public transportation, apparel, and hotel lodging.

If you exclude this statistical “noise” of 5 basis points, Goldman’s “actual” core inflation is closer to 0.11%. Bloomberg Economics has constructed a separate price tracking index specifically to bridge the gap left in the official series.

Even if tonight’s CPI data is on the softer side, it remains an open question whether that will be enough for the Fed to pause rate hikes.

Goldman Sachs points out that its CPI forecast corresponds to a core PCE month-on-month gain of 0.23%, higher than the 0.16% for core CPI. This is because PCE assigns a lower weight to used cars, and source data for subcomponents such as airline tickets, auto insurance, and health insurance in PCE is still expected to show increases. UBS’s forecast for October core PCE is also 0.20%, translating to an annualized rate of about 3.1%.

This means that even if the CPI data signals cooling inflation, the core PCE that the Fed focuses on may remain relatively elevated, making it difficult to provide sufficient grounds for a rate hike pause.

The core judgment from Goldman Sachs rate strategists is: a strong labor market is a “prerequisite” but not a “deciding factor” for further Fed rate hikes—employment data opens the door, but only inflation data can guide the Fed to step through it.

With hawkish expectations already heavily priced in, market reactions to soft data versus hard data are clearly asymmetric.

Goldman Sachs believes that if tonight’s CPI is softer than expected, the market may see a relief rally, but this surge could be erased after Friday’s PPI data release—JPMorgan forecasts a sharp 0.6% month-on-month rise in October PPI; if CPI greatly beats expectations on the upside, it could cement expectations for a December rate hike under pressure from CTA systematic selling, triggering a more pronounced market move.

From a broader perspective, the core factors driving this softer CPI—health insurance methodology reset and used car price declines—have very limited transmission to the Fed’s preferred core PCE index. Meanwhile, consumer inflation expectations remain near a three-year high and PPI is far higher than CPI. To the two FOMC members who have already publicly supported rate hikes, a 0.16% core CPI may only bring about temporary market cheer and is unlikely to fundamentally shift their policy stance.