September Inflation Eases, Bolstering Fed Rate Cut Expectations

Key Takeaways:

• September's headline and core CPI figures came in below expectations.
• Markets are pricing in two more rate cuts by the Federal Reserve this year.
• Gold prices surge and the US dollar weakens following the data release.
• Analysts suggest inflation is under control and the impact of tariffs is limited.

The US Bureau of Labor Statistics released a report on Friday indicating that both overall and core inflation metrics for September fell short of consensus forecasts, paving the way for further monetary easing by the Federal Reserve. This marks the first major economic data release since the end of the government shutdown.

The September unadjusted CPI year-over-year rate registered at 3%, a slight increase from the previous month's 2.9% and the highest level since January 2025. However, this increase was slightly below the widely anticipated 3.1%. The September seasonally adjusted CPI month-over-month rate recorded 0.3%, lower than both market expectations and the prior value of 0.4%. The September unadjusted core CPI year-over-year rate registered at 3%, below market expectations and the previous value of 3.1%. Similarly, the September seasonally adjusted core CPI month-over-month rate recorded 0.2%, also falling short of market expectations and the previous value of 0.3%.

Following the release of the US CPI data, traders increased their bets on the Federal Reserve implementing two more rate cuts this year. Futures contracts linked to the Fed's policy interest rates also indicate that market expectations for a further rate cut at the Fed's January meeting are on the rise.

Spot gold prices surged by over $20 in a short period, reaching $4080 per ounce. The US dollar index fell by more than 30 points in a short period. Non-US currencies broadly strengthened, with the Euro gaining 40 points against the US dollar in a short period. The British pound gained approximately 45 points against the US dollar in a short period. The US dollar weakened against the Japanese yen by nearly 60 points in a short period.

Although the government shutdown caused a halt in the release of economic data, the CPI report was still issued to assist in calculating the 2026 cost-of-living adjustment for millions of retirees and other benefit recipients, which was originally scheduled for release on October 15. The US Bureau of Labor Statistics stated that the September CPI data was collected before the suspension of funding.

The pass-through effect of import tariffs has been relatively gradual, as companies absorbed inventories accumulated prior to the widespread implementation of Trump's tariffs and bore part of the tax burden themselves. Economists point out that companies achieved this at the expense of hiring, and estimate that consumers have borne approximately 20% of the tariff costs to date.

Analyst Chris Anstey suggests that the latest CPI report implies the Federal Reserve will almost certainly cut interest rates again next week, and that the data also supports the Trump administration's view that inflation is under control and tariffs will not trigger a surge in living costs.

Anstey also points out that a key reason for overall inflation being higher than core inflation is the rise in gasoline prices: the gasoline price index rose by 4.1% in September, the largest monthly contributor to growth across all items.

Institutional analysis suggests that because the Federal Reserve has entered a quiet period before the October 29 policy decision, its officials will not comment on Friday's inflation data before making a decision. Despite the slight increase in overall inflation, it seems unlikely to prevent a 25-basis-point rate cut, which has been widely priced in by the market. The Federal Reserve is currently experiencing a period of data blindness—the government shutdown has resulted in the loss of September PPI data, leaving the central bank to rely on incomplete PCE estimates for judgment, and no official employment data has been obtained since the government shutdown earlier this month. Fed Chairman Powell has not expressed opposition to the expectation of a rate cut in October in his recent public statements.

Analyst Emily Graffeo points out that the owners' equivalent rent index in September rose by 0.1% month-over-month, the smallest monthly increase in the index since January 2021. According to Tiffany Wilding, an economist at Pacific Investment Management Company (PIMCO), this is evidence of the long-awaited "normalization of housing and rents" by economists, and this trend may continue as stricter immigration policies alleviate housing pressure.

"This is one of the things that should make the Fed feel comfortable: outside of some pass-through effects related to tariffs, inflation pressures are fairly mild right now," Graffeo says.

Ian Lyngen of BMO Capital Markets points to the impact of the government shutdown on the Fed's interest rate path after next week: "Given that the government shutdown is an ongoing factor, we suspect that expectations for a December rate cut will also be reinforced as a result. The general tone of the US interest rate market has been set, and we expect interest rates to slowly decline from their current levels."