CPI data strengthens interest rate cut expectations; economists warn that inflation may return, and the 10-year U.S. Treasury yield may rise to 6%

The U.S. stock market surged on Friday, reaching a historic high, as the September Consumer Price Index (CPI) came in below expectations, providing stronger justification for the Federal Reserve to continue cutting interest rates next week and in December. However, some economists warn that inflation may resurge in the coming months, and caution should not be taken lightly.

According to the Zhitong Finance APP, Steven Blitz, Managing Director and Chief U.S. Economist at GlobalData TS Lombard, pointed out that inflation could still transmit through the banking system to the real economy in the future, potentially becoming "tricky" again. He even believes that this process could push the current yield of about 4% on U.S. 10-year Treasury bonds up to 6% or higher within the next one to two years.

On Friday, after the September CPI growth rate fell below market consensus, the Dow Jones Industrial Average, S&P 500, and Nasdaq all closed at historic highs. The Dow closed above 47,000 points, marking the 13th historical high this year; the S&P 500 and Nasdaq recorded their 34th and 33rd historical highs in 2025, respectively. Eric Sterner, Chief Investment Officer at Apollon Wealth Management, stated that several components of inflation, including rent, are showing "deflationary signs," but acknowledged that "inflation is sticky," and it will take time to return to the 2% target.

Meanwhile, U.S. Treasury yields were mixed, with the 3-year Treasury yield falling to 3.49%, significantly below the effective federal funds rate of about 4.11%. Interest rate futures indicate a total of 4 to 5 rate cuts of 25 basis points each are priced in from now until mid-2026.

Blitz believes that in the short term, "the economy is actually weaker than the market imagines, and inflation will continue to decline, so the Federal Reserve will cut rates, but it is unlikely to be four or five times." He emphasized that his focus is on the inflation path after this year. Once the 3-year Treasury yield rises above the short-term policy rate, restoring a positive slope to the short-end yield curve, it will trigger banks to release credit, restarting loan expansion. This scenario could occur as early as next summer.

In Blitz's logic, a shift from a negative to a positive short-end curve will strengthen banks' willingness to expand lending, thereby driving corporate and household leveraged spending and supporting sectors like housing. He also added that persistent fiscal deficits, government spending expansion, and the limitations of low-price import benefits due to global trade structures could all contribute to upward pressure on long-term rates and a resurgence of medium- to long-term inflation.

In a report released on Friday, Blitz noted that if the short-end curve turns positive, combined with fiscal stimulus and tax incentives, credit expansion could have inflationary power. Therefore, while it may not be achievable in a matter of weeks, the 10-year yield has a "long-term upward trend" and could rise to 6% or even higher in the next one to two years.

Concerns about a resurgence of medium- to long-term inflation pressures are not unique to Blitz. John Luke Tyner, an investment manager at Aptus Capital Advisors, also pointed out that the lagging effects of the Federal Reserve's rate cuts and the potential end of balance sheet reduction (quantitative tightening, equivalent to an additional rate cut) by the end of 2025 could pose risks for accelerating inflation. He stated that a recovery in bank lending, a rebound in mortgage and refinancing demand, and the fiscal stimulus from Trump's "Big and Beautiful" plan could all reignite inflationary pressures