Traders are hedging toward another rate hike after Wednesday’s consumer price index report showed inflation accelerated in September by the fastest pace in five months.

The 3.7% inflation rate for September announced Wednesday morning was slightly ahead of analyst expectations, driven by elevated energy prices. The higher inflation print led bond traders in futures markets to reprice whether the Federal Reserve will opt to raise rates again on Oct. 28. 

The probability that the Fed will raise rates jumped from 22% on Tuesday to 47% on Wednesday morning, according to CME Group’s FedWatch tool, which uses Fed funds futures prices to create probabilities for rate movement. 

A week ago, markets priced in a 17% chance of a rate hike, but the steep jump overnight brings the probabilities closer to where they were a month ago, shortly after the Fed hiked rates for the first time since 2023 at its September meeting.

Core inflation, which strips out energy and food prices, also edged higher, but by a more modest 2.6%. 

The Fed’s target inflation rate is 2%.

The war in Iran is driving up energy costs at the same time the economy digests the White House’s protectionist trade regime. Amid the volatility, bond traders have been running up the 10-year Treasury bond rate, which is pushing borrowing costs higher and starting to freeze deals in the commercial real estate space.

Analysts at JPMorgan Chase modestly cut the top end of their earnings estimates for the major commercial real estate brokerage firms this week, citing a slowdown in capital markets activity from the elevated rate environment dragging down profits at the brokerages. 

“Some disruption in CRE capital markets is highly likely at this point,” the analysts wrote. “Anecdotally, we have had an increasing number of conversations in the last two weeks with private market participants citing deals being re-traded, financing costs getting in the way of transactions, pricing expectations changing, and timing of deals being pushed out.”