In September, the core CPI in the United States increased by 0.2% month-on-month, the slowest growth rate in three months, raising expectations for another interest rate cut by the Federal Reserve this year

The U.S. September CPI rose 3% year-on-year, falling short of expectations, while core inflation increased 0.2% month-on-month, marking the slowest growth in three months and below the market expectation of 0.3%. This further solidifies market expectations that the Federal Reserve will continue to cut interest rates within the year, clearing the way for next week's rate decision.

On Friday, the U.S. Bureau of Labor Statistics released data showing:

• U.S. September CPI rose 3% year-on-year, estimated at 3.1%, previous value at 2.9%.
• U.S. September CPI month-on-month 0.3%, expected 0.4%, previous value 0.4%.

• U.S. September core CPI rose 3% year-on-year, expected 3.1%, previous value 3.1%.
• U.S. September core CPI month-on-month 0.2%, expected 0.3%, previous value 0.3%.

In the context of the federal government’s ongoing shutdown and the inability to release other official economic reports, this data may help persuade decision-makers that they have room to ease monetary policy again in December, thus clearing the way for further easing actions. The market has fully priced in expectations for two 25 basis point rate cuts for the remainder of the year.

Overall Inflation Cooling, Service Sector Inflation the Main Cause

Although the overall inflation data brings comfort to the market, the details remain mixed. The overall CPI rose 3.0% year-on-year in September, although lower than the expected 3.1%, it is higher than the August reading of 2.9%, marking the highest year-on-year increase since January of this year.

Data shows that the main factor driving overall inflation up is the rise in energy costs. Clothing was one of the products with the largest price increase this month, rising by 0.7%. This likely reflects higher tariffs. Costs for housing, air travel, entertainment, household goods, and operations have all increased, while costs for motor vehicle insurance, used cars and trucks, and communications have decreased.

At the same time, there are signs of a slowdown in price growth in the service sector, with September service sector inflation slowing to its weakest level since November 2021. This partially offsets the pressure from rising energy prices.

Core Indicators Show Comprehensive Slowdown

The core inflation indicators, which are more closely watched by the Federal Reserve, have sent clearer signals of cooling. The year-on-year increase in September core CPI fell from 3.1% in August to 3.0%, the lowest level since June. ** From the breakdown, the significant decline in core service industry costs is a key driver of the softening core inflation.

The "super core inflation" closely monitored by the Federal Reserve—namely, the service industry inflation excluding housing (SuperCore CPI)—has also seen its year-on-year growth rate slow to 3.30%, marking the lowest growth rate since May of this year.

Transportation costs in September also experienced a sharp slowdown, further pulling down the overall inflation level.

The annual rate of goods inflation remains stable at 1.5%. From the annualized data over 3 months and 6 months, the previously feared tariff-driven inflation pressures have not materialized. Overall, the widespread cooling of month-on-month data and the continued decline of core indicators paint a picture of manageable inflation pressures.

In summary, this CPI report provides almost no reason to prevent the Federal Reserve from cutting interest rates again. Before the release of this report, the market had fully digested the expectation of two 25 basis point rate cuts for the remainder of the year. This "lower than expected" data strongly supports this view.

Special Release Amid Government Shutdown

This highly anticipated inflation report was released under special circumstances.

The report was originally scheduled for release on October 15, but due to the federal government shutdown that began on October 1, most operations of the U.S. Bureau of Labor Statistics have been suspended, causing the report to be delayed. Reportedly, to allow the Social Security Administration to calculate its annual cost-of-living adjustment, the Bureau of Labor Statistics recalled some staff to compile and release this CPI data.

The report also specifically noted that due to the government shutdown, Bureau of Labor Statistics staff would be unable to answer public inquiries about CPI data after 12 PM Washington time.

Market Reaction

After the release of U.S. CPI and other economic data, the three major U.S. stock index futures surged briefly, with Nasdaq futures rising nearly 1% intraday.

U.S. Treasury yields fell sharply, with the 10-year Treasury yield dropping over 2 basis points, currently reported at 3.978%.