Inflation Stubbornly Persists as Fed Eyes Rate Cut Next Week

Inflation likely rose again in September, keeping the Fed on alert. The data could cement expectations for a rate cut next week but cloud the outlook for December.

The U.S. inflation picture is unlikely to offer much relief this Friday when the Bureau of Labor Statistics publishes its September consumer price index report. Economists expect inflation to remain steady but still running above the Federal Reserve’s comfort zone, complicating the central bank’s path ahead of next week’s rate decision.

Inflation Stays Sticky

Economists forecast that overall CPI rose 0.4% month over month in September, matching August’s pace, and 3.1% year over year. This would mark the first time this year headline inflation has climbed back above 3%. Core inflation, which excludes food and energy, is expected to rise 0.3% on the month and 3.1% from a year earlier.

While the numbers suggest inflation remains stable, they also point to limited progress toward the Fed’s 2% target. “Core goods inflation should ease slightly, but services inflation will likely keep the overall trend firm,” said Stephen Juneau, economist at Bank of America Securities (BAC). He expects used car prices to moderate, though shelter costs and tariffs could keep pressure on the index.

Shutdown Adds Another Twist

This month’s inflation release is taking place under unusual circumstances. The Bureau of Labor Statistics has recalled a small number of staff amid the government shutdown so that the Social Security Administration can access key data for its annual cost-of-living adjustment. Other economic reports remain suspended, which could leave the Fed with limited visibility when it meets again in December.

In 2013, a similar government shutdown left the CPI sample smaller and less reliable, and economists worry this could happen again. “An incomplete inflation picture could prompt the Fed to pause in December rather than risk over-tightening or cutting prematurely,” said Seema Shah, chief global strategist at Principal Asset Management.

Market Focus Shifts to the Fed

Despite the stickiness in prices, most analysts believe the Fed will proceed with a quarter-point rate cut at its meeting next week. A cooling labor market and softer growth indicators have given policymakers room to pivot toward supporting the economy.

Stock futures edged higher Thursday ahead of the data release, with investors betting that the inflation figures won’t derail the Fed’s plans. The S&P 500 (SPX) and Dow were both within striking distance of record highs, while Treasury yields hovered near 4%.

Even so, the latest inflation print could shape the tone of Chair Jerome Powell’s press conference next week and test how much patience investors still have for the Fed’s “data-dependent” mantra.

Stay ahead of macro events with our up-to-the-minute Economic Calendar — filter by impact, country, and more.