The long-awaited US CPI: Might fall short of expectations, but the market no longer cares.

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The U.S. government shutdown has lasted into its fourth week, making it the second longest shutdown in U.S. history and throwing Wall Street into a "data famine." The delayed U.S. CPI data, long postponed by the shutdown, is about to be released, but this heavy-hitting report, which should have shaken the market, may have missed its optimal window.

At 20:30 Beijing time on Friday morning, the U.S. will release the September Consumer Price Index (CPI) report. Specifically, market consensus expects:

The overall CPI to stubbornly hold near 3%, rising 0.4% month-on-month, up 3.1% year-on-year—the highest since May and above the 2.7% average of the past 12 months;The core CPI (which excludes food and energy prices) is expected to rise 0.3% month-on-month and remain unchanged year-on-year at 3.1%.

Goldman Sachs expects this core CPI to grow 0.3% month-on-month, slightly below market expectations. Tariff pressures are expected to push up prices in categories such as communications, household goods, and entertainment, but the overall inflation trend is still downward.

It is worth noting that tariff-driven inflationary pressures and sticky service sector prices are making the Fed's path back to a 2% inflation target increasingly complex. Multiple Wall Street institutions warn that, although companies have so far only passed on less than 20% of tariff costs to consumers, as inventories dry up and margins continue to compress, larger-scale price pass-throughs may accelerate in the coming quarters.

However, even if this set of data exceeds expectations, it may be difficult to fundamentally change the market's view of the Fed. Given a weak labor market, a gradual rate cut in the near future is almost certain, and the market is nearly 100% certain that the Fed will cut rates by 25 basis points at next week's meeting.

Inflation Excluding Tariffs Likely to Continue Cooling Trend

Institutions differ on their forecasts of sequential core CPI, ranging from a low of 0.2% (7 analysts) to a high of 0.4% (5 analysts), with 64 predicting 0.3%.

The Goldman Sachs economics team expects that the boost from airfares will weaken and continued softness in used car prices will offset higher food and energy costs. Specifically, Goldman expects little change in car prices, a 0.3% rise in car insurance, and a 1.5% drop in airfares.

The impact of tariffs is expected to contribute about 0.07 percentage points to core inflation, mainly concentrated in tariff-sensitive categories such as communications equipment, household goods, and entertainment spending. Goldman predicts tariffs will continue to push up monthly inflation numbers in the coming months, with core CPI month-on-month growth staying in the 0.2%-0.3% range.

But excluding the impact of tariffs, underlying inflationary pressures are decreasing. Goldman analysis notes that the contributions of housing rents and the labor market to inflation are shrinking, offering foundational support for inflation trending downward overall. This aligns with the Fed's recent position focusing more on risks in the labor market.

Uncertainty in Tariff Pass-Through Channels

The timing and extent of tariff pass-through to consumer prices has become a core focus for Wall Street institutions, but expectations vary notably.

BNP Paribas points out that September CPI is "a key checkpoint to review our baseline forecast," stating that "the risk for the September CPI publication is tilted to the downside" since milder housing costs and only moderate goods tariff pass-through may offset seasonal strength in some services. The bank adds that the core CPI reading "tends to be a bit weaker than consensus in September."

However, BNP Paribas expects tariff effects to become more significant in the future, predicting that "more substantial pass-through will occur in September and extend into Q1 2026." The bank notes that "companies have so far been relatively restrained in passing on tariffs, with consumers bearing just under 20% of the cost," but predicts that firms will "intensify tariff pass-through in Q3 and Q4 of 2025 and pass on most of the costs to consumers by the end of Q1 2026."

Citi expects U.S. core CPI to rise 0.28% in September, below the 0.35% in August, as milder housing inflation offsets tariff-driven price pressures. The bank believes that weakening labor and housing markets are reducing inflation risk and support expectations for the Fed to further ease policy.

Principal Asset Management Chief Global Strategist Seema Shah says, "So far, inflation pass-through has been milder than expected, possibly due to a combination of margin compression, advance stockpiling, and trade diversion. While these factors have helped buffer the initial impacts, they are essentially temporary." She adds: "As inventories are depleted, trade routes narrow, and margins continue to shrink, companies may be forced to pass on higher costs to consumers. Therefore, upside risks remain."

CPI Unlikely to Shift Fed Rate-Cutting Path; Markets Focused on Medium-Term Risks

Despite the focus on inflation data, Friday's report is unlikely to change the market's expectations for another Fed rate cut later this month. According to CME's FedWatch Tool, the market is near 100% certain the Fed will cut rates by 25 basis points at next week's policy meeting. Money market current pricing shows a total of 54 basis points of rate cuts priced in by year end, fully accounting for two 25-basis-point cuts.

Julien Lafargue, Chief Market Strategist at Barclays Private Bank, says that in terms of market impact, a clear surprise to the upside is needed to change views on additional rate cuts.

Stephanie Link, Chief Investment Strategist at Hightower Advisors, says if the numbers beat expectations, she anticipates volatility. "I would see it as a buying opportunity, as the economy is strong, the Fed is starting a rate cut cycle, earnings per share are growing by double digits, and Q4 is usually the strongest quarter of the year."

Citi predicts that as labor and housing markets weaken, inflation risks are decreasing, supporting expectations of further Fed easing. Goldman Sachs' trading division analysis shows markets in recent weeks have been dominated mainly by tariff and credit concerns. Since early October, growth expectations have been slightly downgraded, but the more lasting trend is the market's dovish shift on the Fed. Still, the driver for more easing is the weak labor market rather than inflation conditions, so this CPI data is unlikely to be decisive.

Recent Fed meeting minutes show that officials are divided on monetary policy due to differing views on inflation and the labor market. Most officials see employment weakening, which provides grounds for further rate cuts, but some note inflation risks. Overall, officials believe inflation pressures are weakening and expect it to return to the 2% target.

In addition, Joe Clyne of Goldman Sachs' index volatility trading team says that even on the eve of the CPI release, volatility remains elevated, with VIX futures trading near 20. With major events ahead—including trade relations, next week's FOMC meeting, concerns about private credit, and tech giants' earnings season—CPI data's importance is further diluted.

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