LIVE MARKETS-CPI, mortgage rates, rate hike bets are all on the rise

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CPI, MORTGAGE RATES, RATE HIKE BETS ARE ALL ON THE RISE

Things are looking up. And by "things" I mean consumer prices, mortgage rates and the probability of Fed rate hikes.

The Labor Department's Consumer Price Index (CPI) USCPI=ECI, which tracks the prices urban consumers pay for a basket of goods and services, grew by 0.6% in September, heating up from August's 0.4% print, as expected.

Year-over-year, CPI posted a 3.7% increase, an acceleration from the prior month's 3.4% growth, and a tad hotter than the 3.6% consensus.

Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," printed on monthly and annual bases at 0.3% and 2.6%, respectively. Both readings were higher than analyst expectations.

It's the second take on May inflation, after Friday's cooler-than-expected wage growth data, which we'll get to in a minute.

"The inflation news this morning is not comforting by any means. It shows that inflation did accelerate from the previous month and remains a problem for the Fed," Peter Cardillo, chief market economist at Spartan Capital Securities, tells Reuters. "That said, although they might not raise interest rates this month, there’s a good possibility that the Fed may have to increase by 50 basis points in December."

Indeed. Financial markets are now pricing in a 47.1% likelihood of an October rate hike, up from 22.1% just yesterday, according to CME's FedWatch tool. And Cardillo's prediction of a double-sized, 50 basis point hike in December is gaining traction, at a 42.0% probability versus 18.7% on Tuesday.

Line-by-line, a 5.2% monthly jump in energy prices prompted an unwelcome 9.1% surge at the gasoline pump. The prices consumers are paying at the pump have surged by an eye-watering 34.2% since September 2025.

Transportation costs increased by 2.5%, a repeat of the prior month, and are up 7.9% year-on-year. The cost of an airline ticket rose by 1.2%, and has shot up by 22.4% in the last 12 months.

The cost of shelter and services, two metrics closely watched by the Fed, both rose by 0.4%. Year-over-year, shelter and services are both up 3.2%, well north of annual core inflation.

"The pass-through of higher energy costs into other 'core' items may be occurring more rapidly than previously thought," writes Stephen Coltman, head of macro at 21shares. "Warsh will have an important opportunity tomorrow, should he consider it necessary, to prepare investors for a possible rate hike at the next meeting when he makes his final public appearance at the IMF meeting ahead of the Fed blackout window."

Back to wage inflation, briefly. Consumer wages have been running cooler than consumer prices for six months now, putting so-called "real wages" in the red.

That is a worrisome trend; consumer spending accounts for about 70% of the US economy. Once consumers visit the gas station, they have a lot less left over to spend on other things.

Crossing the street to the housing market, the mortgage game is dancing a familiar tango: borrowing costs advance as demand retreats.

The average 30-year fixed contract rate USMG=ECI heated up by 1 basis point to 7.50%. That's the highest it's been since November 2023.

That dampened demand for loans to purchase homes USMGPI=ECI by 4.0%. Refi applications USMGR=ECI — which accounted for a 37.7% share of the mortgage pie — inched 0.4% lower.

Combined, home loan demand softened by 2.7% last week.

With the 30-year fixed rate soaring north of 6% for over four years now, would-be homeowners are resorting to riskier adjustable-rate mortgages, the popularity of which fueled the housing bubble, a precursor to the Great Recession of 2007 to 2009.

"Borrowers continue to rely more on ARM loans to help lower their monthly payments," says Joel Kan, CMB, MBA’s vice president and deputy chief economist. "The ARM share at 10.5 percent was at its highest level since October 2025.”

The 30-year fixed rate currently sits 1.08 percentage points above where it was during the same week a year ago.

Over that same period, purchase applications have dropped by 16.1%, while refi demand has plunged 56.0%.

(Stephen Culp)

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