The last official inflation report before the U.S. government shutdown reveals what the September CPI tells us

On October 24th, Friday, the U.S. Bureau of Labor Statistics (BLS) released the last inflation report completed before the federal government shutdown—the September Consumer Price Index (CPI) report. This official report, delayed by a week and a half, shows that although the inflation rate remains well above the Federal Reserve's 2% target, there are no signs of it spiraling out of control, and there is at least a slight easing in some key areas.

The September CPI increased by 0.3% month-on-month and 3% year-on-year, while the core CPI rose by 0.2% month-on-month and 3% year-on-year, all slightly below market consensus expectations. Although CPI inflation is still significantly higher than the Federal Reserve's target of 2%, this moderate data has reinforced market expectations for a rate cut by the Federal Reserve next week and increased the probability of another rate cut in December.

The effects of tariffs and immigration policies are beginning to show. Clothing prices rose by 0.7% month-on-month, sports equipment costs surged by 1%, and gardening and lawn care services increased by 13.9% year-on-year. Meanwhile, smartphone prices actually fell by 2.2%, with a year-on-year decline of 14.9%. Housing costs, which account for one-third of the CPI weight, increased by only 0.2% month-on-month, and the Owners' Equivalent Rent (OER) rose by just 0.1%, marking the smallest increase in nearly five years.

After the CPI was released, the White House warned that due to the government shutdown disrupting data collection, the October CPI report is unlikely to be published on time, marking the first time in history that an official CPI data report will be absent.

Five Key Points: Inflation Eases but Remains Above Fed Target

The September CPI report can be summarized in five key points.

First, although overall CPI inflation remains well above the Federal Reserve's 2% target, there are no signs of it spiraling out of control, and in fact, there is at least a slight easing in certain key areas. Both core and overall CPI data are below consensus expectations.

Second, the market is almost certain that the Federal Reserve will cut rates next week and has increased the probability of another rate cut in December. CME's tools show that after the CPI release, the U.S. federal funds rate futures market expects less than a 4% chance that the Fed will not cut rates again by the end of this year.

Third, the impact of tariffs and immigration policies is beginning to manifest. Prices for household goods rose by 3% year-on-year, the highest since mid-2023; audio and video equipment increased by 1.6%, the highest since 2021. The "super core" service sector inflation, excluding housing costs, accelerated to a month-on-month increase of 0.35%, one of the highest levels this year.

Fourth, there are signs of easing in housing costs, which account for one-third of the CPI weight. This inflation increased by only 0.2% month-on-month in September, with a year-on-year growth rate steady at 3.6%. The Owners' Equivalent Rent (OER) increased by just 0.1%, the smallest increase since November 2020 Fifth, due to the suspension of government data collection and reporting because of the shutdown, the BLS compiled this report solely for its role as a benchmark for Social Security cost-of-living adjustments. This is likely to be the last official data report released before the deadlock is resolved.

"New Federal Reserve News Agency": CPI may weaken the Fed's hawkish resistance to rate cuts

After the CPI was released before the US stock market opened, US Treasury prices surged, and yields collectively hit daily lows; US stock futures rose, and the stock market opened higher, with all three major US stock indices reaching new historical highs during the session; the US dollar index quickly turned lower and refreshed daily lows, then fluctuated and rebounded, with the stock market turning positive in the early session.

Nick Timiraos, a reporter known as the "New Federal Reserve News Agency," commented:

The significance of the September CPI data for the Federal Reserve is that it may weaken the Fed's hawkish resistance to rate cuts in October or December.

The CPI report released on Friday may lead the Fed to continue cutting rates next week and maintain a moderate inclination for further cuts in subsequent meetings. At the end of this summer, the Fed judged that recent weakness in the labor market offset the impact of slightly easing inflation, thus shifting towards rate cuts, and the September CPI data is unlikely to change this judgment.

The latest data shows that while inflation remains high, it is not as concerning as Fed officials feared when the Trump administration announced significant tariff increases in the spring of this year.

This partly stems from the significant slowdown in the official housing cost growth indicator over the past two years, which has offset the impact of rising prices for imported goods.

Bloomberg economists Anna Wong and Chris G. Collins commented that the CPI report is the first important data released since the US government shutdown, and its growth is tepid enough to allow the Fed to decide to cut rates by another 25 basis points at next week's meeting and continue to cut rates at the December meeting.

Art Hogan, Chief Market Strategist at B. Riley Wealth, stated: "This report will clearly lead the Fed to continue cutting rates at the next meeting. The Fed has made it clear that they are more concerned about weak labor data and will continue to defend their mission of full employment, even if core CPI is well above the (Fed's) target of 2%."

Analytical Views: Inflation Expected to Continue Easing, Tariff Spillover Still Weak

Rick Rieder, Head of Fixed Income at BlackRock and rumored to be a leading candidate for the next Fed Chair last month, stated:

"Overall, today's inflation data is encouraging. Although it is still above the Fed's 2% inflation target, we believe that the overall inflation trend can continue to ease over the next year, as recently shown by inflation breakeven points, which will allow the Fed to maintain a tendency to cut rates."

Krishna Guha, Head of Global Policy and Central Bank Strategy at Evercore ISM, pointed out: "Signs of tariff spillover effects remain weak, supporting the view that tariff increases will translate into a one-time price increase rather than sustained inflationary pressure."

However, Joseph Brusuelas, Chief Economist at RSK, offered a different perspective from the K-shaped economy viewpoint: "From a year-on-year perspective, costs for food, meat, housing, and utilities have risen significantly. Middle-class and lower-income households, with slowing wage growth, are clearly struggling to adapt to the ongoing increase in living costs Those in the lower branch of the K-shaped economy will naturally ask: What do those celebrating a more moderate price increase see that indicates inflation has not eroded my bottom line and standard of living?

White House Issues First-Ever CPI Data Absence Warning

Economists are generally not concerned about the quality of the September CPI inflation report, as data collection was completed before the government shutdown. However, since then, the U.S. Bureau of Labor Statistics has failed to collect new price information.

A social media account affiliated with the White House posted on Friday that funding shortages have prevented investigators from going on-site, "making it impossible for us to obtain critical data." The White House emphasized that this will be "the first time in history" that this data cannot be released.

White House Press Secretary Caroline Levitt posted, "Democrats' choice to keep the government shut down could lead to the absence of the October inflation report, throwing businesses, markets, households, and the Federal Reserve into chaos."

BLS spokesperson Stacey Standish stated, "Once funding is restored, BLS will resume normal operations and will publicly announce any changes to the news release schedule on the BLS release calendar." An official from the U.S. Department of Labor noted that this aligns with how BLS has handled past government funding interruptions, stating that the pause in data collection will delay the release of the October CPI report.

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