September Inflation Data: A Closer Look
At 8:30 PM Beijing time on Friday, the US is scheduled to release its September CPI data. Forecasts suggest that inflation is stubbornly holding around 3%, highlighting the persistent impact of tariffs and stickiness in the service sector hindering the Federal Reserve's efforts to achieve its 2% target.
This data comes in the wake of a US government shutdown that became the second-longest in the country's history, with no clear end in sight.
Economists expect the overall CPI to rise 0.4% month-over-month, matching August's pace. On a year-over-year basis, it is projected to increase to 3.1%, the highest level since May and above the 12-month average of 2.7%.
The core CPI, which excludes volatile food and energy prices, is expected to rise 0.3% month-over-month and 3.1% year-over-year, both unchanged from August.
The Lingering Impact of Tariffs
Bank of America economist Steven Juneau noted in a Monday preview report that tariffs remain a "source of goods price inflation," and that this impact will persist "over the coming quarters." However, he noted that falling used car prices have partially offset the sharp fluctuations that plagued inflation data earlier this summer.
Juneau added that non-housing services inflation is expected to slow only slightly, warning that this category will remain "uncomfortably high" due to the persistent stickiness of core service prices such as healthcare and transportation.
Divergent Views on Tariff Impact Timing
BNP Paribas described the September CPI report as a "key node for assessing our baseline forecast," noting that "risks to the September CPI release are skewed to the downside," as softer housing costs and relatively benign tariff pass-through in the goods sector could offset seasonal strength in other service categories. The bank added that "September core CPI tends to print slightly below consensus expectations."
However, BNP Paribas anticipates a greater impact from tariffs in the future, expecting a "more material pass-through to occur in September and extend into 1Q26."
The bank noted that "corporations have taken a relatively restrained approach to passing through tariffs, with consumers bearing less than 20% of the costs," but anticipates companies will increase "tariff pass-through efforts in 3Q and 4Q 2025, transferring most of the cost to consumers by the end of 1Q26."
This focus on the timing of tariff impact resonates on Wall Street, with Goldman Sachs also pointing to a "tug of war" between softening goods prices and the persistent impact of tariffs.
The Goldman Sachs economics team, led by Jan Hatzius, expects that the waning boost from September's airline fare increases and continued weakness in used car prices will offset rising food and energy costs. Nevertheless, Goldman Sachs noted that even if "the contributions to inflation from housing and the labor market are diminishing, and the underlying inflation trend is further declining," tariffs will still "push monthly inflation higher through early next year."
Inflation Risks Still Skewed to the Upside
Seema Shah, chief global strategist at Principal Asset Management, said that in addition to Friday's data, overall inflation risks still skew to the upside.
She stated, "So far, the pass-through of tariffs has been more muted than anticipated, likely due to a confluence of factors, including profit compression, front-loading of inventories, and trade diversion. While these factors have helped to cushion the initial shock, they are inherently temporary."
She added, "As inventories are depleted, trade routes narrow, and profit margins continue to shrink, businesses may be forced to pass higher costs onto consumers. Therefore, upside risks remain."
Market Expectations for a Rate Cut
Overall, Friday's report is unlikely to change market expectations for the Federal Reserve to cut rates again later this month. According to the CME Group's "FedWatch" tool, the market is pricing in a near 100% certainty that the Fed will announce a 25 basis point rate cut at its policy meeting next week.
JPMorgan Global Market Intelligence Head Tyler wrote in a note to clients on Wednesday, "We agree with the market and think it would take extreme tail risk for the Fed to stay put."
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