Key Takeaways

• Markets await September CPI data, potentially showing inflation stubbornly around 3%.
• Tariff impacts and persistent service price inflation challenge the Federal Reserve's 2% target.
• Economists expect a 3.1% year-over-year increase in the headline CPI, the highest since May.
• Some financial institutions anticipate a larger tariff impact in the coming months.
• The CPI data is unlikely to alter market expectations for a Federal Reserve rate cut.

Stubborn Inflation and the Tariff Shadow

The financial markets are bracing for the release of the September Consumer Price Index (CPI) data, anticipated to reveal that U.S. inflation remains stubbornly anchored near 3%. This persistence raises concerns about the Federal Reserve's (Fed) ability to achieve its target of bringing inflation down to 2%. This challenge is largely attributed to two primary factors: firstly, the lingering effects of tariffs imposed by the United States on certain imports, and secondly, the continued elevation of service prices, which are known for their stickiness and slower response to economic shifts.

CPI Forecast Analysis

Economists project that the headline CPI will increase by 0.4% month-over-month, matching August's growth rate. On a year-over-year basis, it is expected to rise to 3.1%, marking the highest level since May and exceeding the 12-month average of 2.7%. As for the core CPI, which excludes volatile food and energy prices, a monthly increase of 0.3% and a year-over-year increase of 3.1% are anticipated, mirroring the figures recorded in August.

Tariff Impact on Inflation

Some economists have pointed out that tariffs remain a source of inflation in commodity prices, and they expect this effect to persist in the coming months. Although the decline in used car prices has partially offset the impact of the significant increases in commodity prices earlier this year, inflationary pressures resulting from tariffs remain in place.

Service Sector Challenges

In addition, the Federal Reserve faces another challenge in the service sector, where only a slight slowdown in inflation is expected. This is due to the continued high prices of basic services, such as health care and transportation, making this sector "worrisomely high," according to some analysts.

Financial Institutions' Forecasts of Tariff Impact

Some financial institutions indicate that the impact of tariffs may be greater in the coming months. For example, one institution expects the greatest impact of tariffs to be in the first quarter of 2026, when it anticipates that companies will pass most of the tariff costs on to consumers.

Impact of CPI Data on Federal Reserve Policy

Despite the importance of CPI data, it is unlikely to affect the Federal Reserve's decision to cut interest rates at its next meeting. Financial markets almost certainly expect the Federal Reserve to cut interest rates by 25 basis points at its upcoming meeting.