The belated US CPI: may not meet expectations, but the market no longer cares

The U.S. government shutdown has now lasted for four weeks, marking the second-longest shutdown in U.S. history and leaving Wall Street in a "data famine." The U.S. Consumer Price Index (CPI) data, which has been delayed due to the shutdown, is about to be released, but this heavyweight report that should have shaken the market may have already missed its optimal timing.

At 20:30 Beijing time on Friday, the U.S. will release the September Consumer Price Index (CPI) report. Specifically, the market generally expects:

• Overall CPI stubbornly remains around 3%, with a month-on-month increase of 0.4% and a year-on-year increase of 3.1%, the highest level since May, exceeding the average of 2.7% over the past 12 months;
• The core CPI, excluding food and energy prices, is expected to rise 0.3% month-on-month and remain flat at 3.1% year-on-year.

Goldman Sachs expects the core CPI to grow by 0.3% month-on-month, slightly below market expectations. Tariff pressures are expected to push up prices in categories such as communications, household goods, and entertainment, but the overall inflation trend remains downward.

It is worth mentioning that the inflation pressure from tariffs and the stickiness of service prices are making the Federal Reserve's return to the 2% inflation target increasingly complex. Several Wall Street institutions warn that although companies have so far passed on less than 20% of tariff costs to consumers, as inventories deplete and profit margins continue to narrow, larger-scale price pass-through may accelerate in the coming quarters.

However, even if this data exceeds expectations, it is unlikely to fundamentally change the market's view of the Federal Reserve. Given the weak labor market, a gradual rate cut has almost become a foregone conclusion, with the market expecting with nearly 100% certainty that the Federal Reserve will cut rates by 25 basis points at next week's meeting.

Inflation Excluding Tariffs May Continue to Cool

There are discrepancies among institutions regarding the forecast for the sequential core CPI, ranging from a low of 0.2% (predicted by 7 analysts) to a high of 0.4% (predicted by 5 analysts), with 64 forecasters expecting 0.3%.

Goldman Sachs' economic team expects the diminishing effect of airfare prices and the continued weakness in used car prices to offset the impact of rising food and energy costs. In specific categories, Goldman Sachs predicts little change in car prices, a 0.3% increase in auto insurance, and a 1.5% decrease in airfare prices.

The tariff effect is expected to contribute about 0.07 percentage points to core inflation, mainly concentrated in tariff-sensitive categories such as communications equipment, household goods, and entertainment consumption. Goldman Sachs predicts that in the coming months, tariffs will continue to push up monthly inflation data, with core CPI month-on-month growth maintaining in the range of 0.2%-0.3%.

However, after excluding the impact of tariffs, underlying inflation pressures are weakening. Goldman Sachs analysis indicates that the contribution of housing rents and the labor market to inflation is shrinking, providing fundamental support for overall inflation to decline. This judgment aligns with the Federal Reserve's recent increased focus on labor market risks.

Uncertainty in Tariff Transmission Path

The timing and extent of the transmission of tariffs to consumer prices have become the focal point of Wall Street institutions, but there are significant differences in expectations among parties.

BNP Paribas pointed out that the September CPI is a "key checkpoint for reviewing our baseline forecast," believing that "the risks of the September CPI release tend to be downward," as milder housing costs and only moderate transmission of goods tariffs may offset the seasonal strength of other service categories The bank added that the core CPI reading "is often slightly weaker than consensus expectations in September."

However, BNP Paribas expects the impact of tariffs to become more significant in the future, predicting that "more substantial transmission will occur in September and continue into the first quarter of 2026." The bank noted that "companies have taken a relatively restrained approach to passing on tariffs, with consumers bearing just under 20% of the costs," but it is expected that companies will "intensify tariff transmission in the third and fourth quarters of 2025, passing most of the costs onto consumers by the end of the first quarter of 2026."

Citigroup expects the U.S. core CPI to rise by 0.28% in September, down from 0.35% in August, as milder housing inflation offsets tariff-driven price pressures. The bank believes that weakening labor and housing markets are reducing inflation risks, supporting expectations for further easing by the Federal Reserve.

Seema Shah, Chief Global Strategist at Principal Asset Management, stated that so far, the transmission of inflation has been more moderate than expected, which may be due to a combination of margin compression, preemptive inventory accumulation, and trade shifts. While these factors have helped cushion the initial impact, they are essentially temporary. She added, "As inventories deplete, trade routes narrow, and margins continue to shrink, companies may be forced to pass on higher costs to consumers. Therefore, upside risks remain."

CPI unlikely to shake the Fed's rate cut path, market focuses on medium-term risks

Despite the attention on inflation data, Friday's report is unlikely to change market expectations for another rate cut by the Federal Reserve later this month. According to the CME FedWatch tool, the market expects with nearly 100% certainty that the Fed will cut rates by 25 basis points at next week's policy meeting. Current pricing in the money market indicates a rate cut of 54 basis points by the end of the year, equivalent to fully absorbing two cuts of 25 basis points each.

Julien Lafargue, Chief Market Strategist at Barclays Private Bank, stated that for the market impact, a significant upside surprise would be needed for the market to change its view on additional rate cuts.

Stephanie Link, Chief Investment Strategist at Hightower Advisors, stated that if the numbers are higher than expected, I anticipate volatility. I would view it as a buying opportunity, as the economy is strong, the Fed is entering a rate-cutting cycle, and earnings per share are growing at double digits, with the fourth quarter typically being the strongest quarter of the year.

Citigroup expects that as the labor and housing markets weaken, inflation risks are decreasing, supporting expectations for further easing by the Fed. Analysis from Goldman Sachs' trading department shows that the market has been primarily dominated by tariff and credit concerns in recent weeks, with growth expectations slightly downgraded since early October, but the more sustained dynamic is the market's dovish shift towards the Fed. Nevertheless, the driving force behind the market pricing in more easing is the weak labor market rather than the inflation situation, so this CPI data is unlikely to be decisive The recent Minutes from the Federal Reserve show that officials have differing views on inflation and the labor market, leading to disagreements on monetary policy. Most officials believe that employment is weakening, which provides a rationale for further interest rate cuts, but some officials noted inflation risks. Overall, officials believe that the impact of inflation is diminishing and expect it to return to the 2% target.

In addition, Joe Clyne from Goldman Sachs' volatility trading team believes that even on the eve of the CPI release, volatility levels remain high, with VIX futures trading around 20. As significant events such as trade relations, next week's FOMC meeting, concerns over private credit, and earnings season for tech giants approach, the importance of the CPI data is further diluted