Inflation surprised to the upside again on Nov. 10. So why is one of Wall Street’s biggest money managers sounding calm?
Consumer prices rose 0.4% in October, above the 0.3% economists expected, CNBC reported. Core prices, which exclude food and energy, rose 0.3%, also hotter than forecast.
Vanguard’s view is that the headline number hides more than it shows.
“Lingering tariff effects and higher energy prices account for much of the inflation overshoot,” Josh Hirt, Vanguard’s senior U.S. economist, said in commentary shared with TheStreet. “Excluding those supply factors, underlying inflation is much closer to the Fed’s 2% target.”
The 3 shocks behind your higher prices
Vanguard breaks Tuesday’s core inflation into three “outsized shocks.” They are tariffs, energy prices and demand tied to the AI buildout.
That third one is showing up in your utility bill. Electricity prices rose 0.9% in October alone, CNBC reported, as data centers soak up power.
Read more: Jumbo Fed rate-hike warning sends shock waves after inflation surprise
The Fed’s preferred gauge tells the same story. Core prices measured by the Personal Consumption Expenditures index rose 3.1% from a year earlier in September, the Bureau of Economic Analysis said.
By my math, that’s 1.1 percentage points above the Fed’s 2% goal. Vanguard argues most of that gap comes from the three shocks, not from an economy running too hot.
“While overall inflation has moderated little, its composition has shifted considerably,” Hirt said.
Why the tariff effect should fade first
Hirt expects tariffs to provide “the most immediate source of disinflation.” The price increases from early 2025 are about to drop out of the year-over-year math.
By April 2027, that mechanical effect alone should bring core PCE inflation toward 2.5%, Vanguard said.
By my math, that would cut roughly 0.6 percentage point off September’s 3.1% reading. That happens without any change in what stores charge today.
Energy is the slower problem. Oil prices have stayed near $100 a barrel for much of the year, Hirt said, which keeps feeding into transportation and other costs.
“Absent a renewed and sustained increase in prices,” he said, energy’s contribution “should remain limited.”
October CPI ran hot, and Vanguard, blaming tariffs, energy and AI, raised its core forecast to 3.2%.
Vanguard still sees another rate hike coming
Just because Vanguard is calm doesn’t mean it predicts no hike.
Energy costs have lasted long enough to seep into core prices, Hirt said. That prompted Vanguard to raise its year-end 2026 core inflation forecast to 3.2% and add one expected Fed rate hike in early 2027.
The firm posted the update on its U.S. economic outlook page on Nov. 9.
Some Fed officials want to move faster. Gov. Christopher Waller said Nov. 10 he is “leaning toward” a December hike and could back a half-point move if inflation data runs hot, CNBC reported.
More on the Fed and Inflation:
- Fed rate hike may not be ‘one and done’ if AI boom fuels inflation
- Bank of America warns oil could force a Fed interest-rate rethink
- Mortgage rates are moving, but the Fed may have other plans
“Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take,” Waller said in London.
Dallas Fed President Lorie Logan said after the CPI report that she sees a need for two more quarter-point increases, CNBC reported.
Traders now fully price a quarter-point hike at the Dec. 8-9 meeting, per CME Group’s FedWatch tool. The Fed held its benchmark rate at 3.75% to 4% in October.
What a slower Fed path would mean for your wallet
Vanguard’s case is that “modest policy adjustments” can restore price stability while keeping the job market balanced. That matters for every rate you pay.
Start with mortgages. The 30-year fixed rate averaged 7.18% in the week ended Nov. 5, down from 7.24% a week earlier, according to Freddie Mac. A year ago, it was 6.22%.
By my math, that difference costs about $255 a month on a $400,000 loan. That’s roughly $3,056 a year.
Credit cards move faster. Their rates track the Fed, so a quarter-point December hike adds about $15 a year in interest on a $6,000 balance, by my math. A half-point hike doubles that.
The flip side helps savers. As long as the Fed holds rates up, high-yield savings accounts and CDs keep paying more.
The real test arrives before Christmas
Not everyone shares Vanguard’s calm.
“This was the report the market could least afford to see,” Karen Manna, fixed income investment strategist at Federated Hermes, told CNBC.
The next read on the Fed’s preferred gauge, October PCE, arrives Nov. 25. If it shows the tariff effect starting to fade, Vanguard’s patient view gets stronger.
If it doesn’t, the hawks get their way. Either way, pay down variable-rate debt now, before the next hike lands.
Related: Vanguard economist says sticky inflation will test your patience
