Headline consumer prices in the U.S. increased by 3.0% in the twelve months leading up to September, a pace quicker than the previous month but below the anticipated rise of 3.1%. This official report is expected to attract significant attention from Federal Reserve policymakers as they consider a potential interest rate cut in the upcoming week. In August, the measure of inflation, which experienced a 10-day delay in its release due to a federal government shutdown, was recorded at 2.9%. Workers temporarily recalled to compile the consumer price index due to a November 1 deadline for the Social Security Administration to announce its annual adjustments to benefits, which consider changes in the cost of living. The month-on-month figure moderated to 0.3%, falling short of expectations that it would align with August’s rate of 0.4%. The “core” consumer price index, regarded by the Fed as a fundamental indicator of inflation in the world’s largest economy, registered a year-over-year increase of 3.0% and a monthly rise of 0.2%. Expectations among analysts were set at 3.1% and 0.3%, figures that would have aligned with those recorded in August.

In a note, analysts highlighted that prices in categories associated with extensive U.S. tariffs, including apparel, footwear, household furnishings, and toys, strengthened in September. Hotels and airfares experienced a significant increase; however, shelter costs “cooled notably” and food expenses declined, according to the analysts. Observers have been attentive to the potential effects of President Donald Trump’s trade policies, which have elevated the effective tariff rate to an estimated 18%, marking the highest level in nearly a century, on inflation dynamics. A considerable number of firms expedited their order placements ahead of the levy enactment earlier this year, securing inventory that enabled them to mitigate certain price increases. As backlogs are depleted, it remains uncertain whether businesses, keen to avoid alienating customers, will opt to increase prices. “The significant uncertainty lies in the durability of tariff-linked inflation. Will this be a transient occurrence that diminishes by March, or an ongoing trend that exerts upward pressure on prices for several quarters ahead?” the analysts stated.

Depending on the duration of the U.S. government’s closure, Friday’s inflation data could serve as one of the few indicators available to the Fed as it considers the trajectory for interest rates throughout 2025. The central bank reduced borrowing costs by 25 basis points last month, emphasizing a focus on indications of decelerating employment growth rather than persistent inflationary pressures. Nonetheless, as a result of the shutdown, participants in the rate-setting Federal Open Market Committee will lack access to the most recent monthly job market report, depending instead on alternative information. Markets continue to expect that the Fed will ultimately opt to reduce rates by an additional quarter of a percentage point during its two-day meeting commencing next Tuesday, followed by another reduction of the same magnitude at its concluding meeting of the year in December. Reports indicates that the likelihood of an October rate cut has been significantly solidified following the release of the September consumer price index, with a probability exceeding 96% for a cut in December. Stephen Brown indicated that the inflation data provides the central bank with the “green light to cut,” noting that “the downside surprise to core CPI prices in September should make the Fed feel even more comfortable with its likely decision to cut interest rates next week.”

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