Inflation Reaccelerates to 3.6% as Tech Earnings Shake AI Trade

Key points

• The PCE price index rose 0.5% in September, bringing annual inflation to 3.6%, up from 3.4% in August.
• Core PCE inflation, excluding food and energy, increased 0.3% monthly to 3.1% annually.
• The Federal Reserve maintained interest rates, with two officials voting for a 25 basis point hike.
• Alphabet shares dropped more than 10% after Q3 profit missed expectations due to slow ad revenue growth.
• Microsoft gained premarket after reporting 19% revenue growth, driven by 48% expansion in its Azure cloud unit.
• U.S. GDP grew at a 3.4% annualized rate in Q3, outpacing the 3.0% forecast, fueled by AI infrastructure investment.

Background

Inflation had previously been revised down in August due to methodology changes, but energy costs from the Iran conflict kept prices above the Fed’s 2% target. The Fed raised rates for the first time in three years in September, with markets expecting another hike in December. Earlier in October, hotter CPI data and mixed bank earnings had already pressured Wall Street futures.

How outlets are covering it

Investing.com emphasized the divergence in tech stocks, noting that Alphabet’s weak ad revenue and Samsung’s missed semiconductor profit expectations cast doubt on AI returns, while Microsoft’s cloud strength offered a counterpoint. CNN highlighted the broader economic picture, pointing to faster GDP growth but rising inflation and a falling savings rate. AP News framed the inflation data within the context of midterm elections, noting that affordability concerns have soured voters on the economy and President Trump’s handling of rising costs, with gas prices averaging $4.25 a gallon.

Why it matters

The combination of reaccelerating inflation and strong economic growth puts pressure on the Federal Reserve to raise rates again in December. This could impact the AI trade, as higher borrowing costs may strain the massive capital expenditures of tech firms. The divergence in tech earnings also signals that not all AI investments are yielding immediate returns, potentially affecting market sentiment and investment flows.

What to watch

Investors will watch upcoming third-quarter GDP data and the PCE price index for further signs of inflation trends. The ECB is expected to keep rates steady on Thursday. Amazon is set to report earnings after the market close on Thursday. The Fed’s December meeting will be a key focal point for potential rate hikes.