Impact of September CPI Inflation Data on Federal Reserve Outlook

The market is closely watching the release of the September CPI inflation data by the US Department of Labor. This report was originally scheduled to be released last week but was postponed due to the government shutdown. The market hopes that this data will provide guidance on the likelihood of a Federal Reserve (Fed) interest rate cut, but it also fears that the data may be incomplete or inaccurate due to the shutdown. To ensure that the US Social Security Administration can "accurately and timely pay benefit entitlements under the law," the agency temporarily recalled some furloughed staff to sort data. According to a statement from the Bureau of Labor Statistics, "No other economic data will be rescheduled or released until the government resumes normal operations." This will be the first major economic data released since the US government shutdown for three weeks. CPI data is crucial in the Federal Reserve's policy considerations, serving as the basis for assessing whether to cut interest rates again after the end-of-October meeting. If inflation is stronger than expected, and if the data shows that US President Donald Trump's tariff policy has a significant impact, it will further strengthen the reasons for the Federal Reserve to remain cautious.

Impact of Inflation Data on Precious Metals

In addition, after precious metals hit new record highs driven by safe-haven demand and expectations of Federal Reserve interest rate cuts, this week saw profit-taking and significant sell-offs. Spot gold and silver prices have fallen sharply from their historical highs. The market is focused on tonight's CPI data to determine whether the effect of interest rate cuts on precious metals is still valid.

Inflation Expectations and their impact on Fed Policy

The market predicts that the September data will be similar to the previous data, believing that CPI will grow by 0.4% and 3.1% month-on-month and year-on-year respectively, and that core CPI will grow by 0.3% and 3.1% month-on-month and year-on-year respectively. If the final published values meet expectations, this would indicate that CPI inflation has recorded its highest level since May 2024, or 17 months. US CPI growth accelerated throughout the summer, and in August recorded its largest increase this year, exceeding economists' expectations. After excluding volatile food and energy prices, core CPI also hit new record highs in July and August. However, US Treasury Secretary Bessent said that energy prices have fallen and expects CPI data to start falling next month, and the fall will be more obvious the following month. Bank of America expects overall CPI to rise by 0.3% month-on-month in September and remain at 3.0% year-on-year, slightly lower than the market expected consensus; core CPI expectations are in line with market expectations. The bank believes that core commodity prices are expected to rise by 0.1% month-on-month, a slowdown from the previous few months, mainly due to falling used car prices. Core commodity inflation is expected to remain at 0.2% month-on-month. Upward pressure on commodity inflation from tariffs will continue, and is expected to continue to play a role in the next few quarters. Overall, Bank of America believes that the September CPI data will be generally stable, and that the stickiness of inflation stems more from tariff-related commodity costs than demand-driven, which supports the Federal Reserve's expectations of continuing to gradually cut interest rates. The Federal Reserve will hold a meeting next week. According to the Chicago Mercantile Exchange (CME) FedWatch tool, futures markets expect the Federal Reserve to cut interest rates by 25 basis points in October with a probability of nearly 100%, and to cut interest rates again by the same amount in December with a probability of 96.1%. Kristy Akullian, head of investment strategy for the Americas at BlackRock, said: "I don't think the CPI data will show anything that changes the Federal Reserve's decision in October. From the Federal Reserve's recent statements, they believe that current interest rate levels are restrictive, so the next inclination is still to cut interest rates." She added that although price levels are an important measure of the health of the US economy, they are not the most critical factor at present. "I think the variables that deserve more attention at present are the labor market and the transmission of its weakness to the real economy." She pointed out that if there is a significant decline in the labor market, it will put downward pressure on prices, which may offset the upward impact of tariffs.

Is CPI Data Reliable After Temporary Staff Recall Due to Government Shutdown?

The US government shutdown has posed many challenges to the release of key economic data. The US Bureau of Labor Statistics faces problems with staff shortages and reduced data collection points, which may make the CPI data to be released unable to fully, accurately and realistically reflect the true economic situation. Jan Hatzius, chief US economist at Goldman Sachs, pointed out that collecting CPI data is more complicated than employment data. Only 10% to 20% of CPI data can be easily traced and collected, while most of the remaining data requires manual collection. This leaves the Department of Labor with two undesirable options: either collect data hastily, which may lead to a decline in data quality; or use September and November prices to estimate October prices. Vishal Khanduja, head of fixed income at Morgan Stanley Investment Management, said that investors should be skeptical about the purity of CPI data. He also pointed out that outdated data collection methods and insufficient staffing may lead to incomplete data. However, the collection and release of other data remains suspended during the government shutdown, making CPI the only data that investors and the Federal Reserve can refer to. Veronica Clark, an economist at Citi, pointed out that if the shutdown continues until November, the US Bureau of Labor Statistics will face greater pressure, and data collection for November may also be affected.

How Do Other Economists View This Data?

Mark Zandi, chief economist at Moody's Analytics, expects overall prices to rise 0.35% month-on-month and 3.0% year-on-year in September; core CPI to rise 0.22% month-on-month and 3.0% year-on-year, a slight slowdown from August. He pointed out that high energy and food prices have a spillover effect, that the transmission of tariffs will continue into next year, and that tightening immigration policies will raise labor costs, which will raise food and service prices. Bernard Yaros, chief US economist at Oxford Economics, expects overall inflation to rise 0.4% month-on-month in September, mainly from food and energy. Core CPI is expected to rise 0.3%, a moderate increase. Prices of goods affected by tariffs, especially cars, continue to face pressure, and a rebound in consumption may push up prices of optional services. Ryan Young, senior economist at the Competitive Enterprise Institute, believes that short-term inflation may remain at around 3%. Rising costs caused by tariffs are being passed along the supply chain, and prices of cars, building materials, aluminum cans, and goods containing rare earth metals such as electric vehicles and smartphones will rise. He expects the Federal Reserve to continue cutting interest rates to alleviate unemployment, even if it comes at the cost of slightly higher inflation. Stephen Kates, an analyst at Bankrate, said that the monthly increase in CPI in September is expected to be similar to August, at 0.4%, but the year-on-year increase may rise to 3.1%. Energy will be the main driver, durable goods inflation will remain high, and a slowdown in housing inflation will help alleviate overall pressure. The downward trend in housing costs may continue until 2026. Maurice Obstfeld, a researcher at the Peterson Institute for International Economics, believes that inflation is not much different from August. Core PCE will rise 2.9% year-on-year, and the increase in imported goods and substitutes affected by tariffs may accelerate. If inflation rises again, the Federal Reserve will be more cautious about cutting interest rates, and many officials have expressed concern about persistent inflation. Regarding the impact of the data on the Federal Reserve, Zandi added that the Federal Reserve will continue to prioritize economic weakness and continue to cut interest rates, believing that inflation will not last long, but this action involves risks. Yaros pointed out that the CPI results are unlikely to change the Federal Reserve's October policy judgment. Although inflation remains high, CPI is not completely consistent with PCE, and the labor market's "low hiring, low layoff" balance is becoming fragile, and the risk of layoffs is rising.