After a delay due to the US government shutdown, the US September CPI figures will be released on Friday. It’s one of the few official economic data points traders can analyze this month. Without key labour data for September, this inflation data is likely to be particularly important.
The Fed will hold its October rate decision next week, with markets pricing in a 97% chance of a rate cut. How the data might affect the decision will be harder to parse, since the Fed is in its pre-rate decision blackout period, in which officials don’t offer their opinions on monetary policy. Friday’s data will be pivotal for markets to calibrate their projections on monetary policy for the coming months.
What to Look Out For
Economists generally agree that US headline inflation in September will increase slightly to 3.0% from 2.9%. The September PMI report indicated ongoing price pressures in the non-manufacturing sector, with items like audio equipment and imported fresh fruit pushing up consumer prices. The core inflation rate, which excludes more volatile components like energy and food, is also forecasted to be 3.0%, slightly lower than 3.1% in August.
Economists have argued that inflation will rise due to the pass-through effect of tariff costs. However, the PMI figures for last month showed a reduction in inflation pressures. And in the past, economists have predicted inflation would rise, only to have the data show that tariff pressures were not as severe as initially feared. On the other hand, inflation has been rising since April, when US President Trump imposed the bulk of his tariff plan.
What to Expect From the Markets After US CPI Data?
It’s unlikely that the CPI figures will derail the Fed’s October rate cut, unless the data is widely beyond expectations. However, hotter-than-anticipated inflation could put the December rate cut in doubt. The Fed has repeatedly said it is concerned about tariff-driven inflation, which means it could be sensitive to an overshoot in the data.
Several Fed officials have argued that inflation could rise further because tariffs haven’t yet affected it. Other officials say that inflation from tariffs will be transitory. The key to the data is which side of that debate gets support, and therefore could push monetary policy in the coming months.
There Are Concerning Signs
In general, higher-than-expected inflation would likely support the dollar in the short term, while lower-than-expected inflation would weaken it. But the market could be particularly skittish about prospects that the Fed will keep rates higher and punish the dollar. Fed officials have warned of increasing signs of liquidity shortages, a condition that often precedes a significant market correction or crash. Higher rates would make that situation even worse. The Fed has also said it would stop running down its balance sheet to support liquidity.
That means that if inflation is higher than expected, the dollar could weaken relatively soon afterwards. And if inflation is lower than expected, the prospect of additional Fed easing could also undermine the dollar. This leaves a relatively narrow window around the current market expectations that would support the dollar in the wake of the data.
