The Bureau of Labor Statistics reported that inflation increased by 0.4% in September which was above consensus expectations of a 0.3% increase. Annual inflation rose by 8.2% compared to last year which was lower than the peak of 9% inflation in June.

However, the report continued a larger trend of core CPI continuing to strengthen while many were hoping that the Fed's rate hikes would start to have some impact on suppressing inflationary pressures. Core CPI came in at 0.6% which was an acceleration from 0.5% last month and above consensus expectations of a 0.4% increase. On an annual basis, core CPI came in at 6.6% which is the most since August 1982.

The stock market plunged at the news with the S&P 500 (SPY  ) opening 2% lower. This was despite some positive newsflow prior to the inflation report due to reports of a possible change in policy by incoming U.K. Prime Minister Liz Truss to raise corporate income taxes and better-than-expected earnings reports which increased optimism that Q3 could see continued earnings growth.

However, the stock market did surprise bears who were likely looking for a breakdown as it reversed higher and finished up nearly 3%. Market participants attributed the strength to the U.K. change in policy removing some tail risk from markets, and many seeing the current report marking a 'peak' in core CPI due to recent developments in the labor market and real-time data from the real estate market which should portent a softening in rents.

The bond market also rallied as the 10Y hit a high of 4.1% before closing at 3.95%. One interesting note about the market action is that the leaders were higher-quality companies including those in the defense and utilities sectors.

In terms of inflation components, food prices were up 11.2% from last year. This was more than enough to offset the impact of a 4.9% decline in gas prices. Rents were also up 0.7% and 6.6% from a year ago. Overall, average hourly earnings on an inflation basis were down 0.1% and are off 3% from last year.

The CPI report led to the chances of a 75 basis point hike at the November meeting increasing to 98%. Odds of a 75 basis point hike at the December meeting also climbed higher.