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Investing.com - Headline consumer prices in the U.S. rose by 3.0% in the twelve months to September, faster than the prior month but cooler than estimates for a rise of 3.1%, in an official report that will likely be closely watched by Federal Reserve policymakers mulling over a potential interest rate cut next week.
In August, the gauge of inflation, whose release was delayed by 10 days due to an ongoing federal government shutdown, stood at 2.9%. Furloughed workers at the Bureau of Labor Statistics were temporarily recalled to put together the consumer price index because of a November 1 deadline for the Social Security Administration to unveil its annual adjustments to benefits, which take changes in cost of living into account.
Month-on-month, the figure eased to 0.3%, compared to expectations that it would match August’s pace of 0.4%.
The so-called "core" consumer price index (CPI), which the Fed assesses as an underlying measure of inflation in the world’s biggest economy, was 3.0% year-over-year and 0.2% on a monthly basis. Analysts had anticipated readings of 3.1% and 0.3%, which would have both matched the number in August.
In a note, analysts at Vital Knowledge flagged that prices in categories linked to sweeping U.S. tariffs, such as apparel, footwear, household furnishings and toys, firmed in September. Hotels and airfares also jumped, but shelter costs "cooled notably" and food expenses were lower, the analysts said.
Observers have been keen to see how President Donald Trump’s trade policies, which have driven the effective tariff rate up to an estimated 18%, the highest level in just under a century, will impact inflation. Many companies rushed to lock in orders prior to the implementation of the levies earlier this year, providing them with inventory that allowed them to evade some price hikes. As those backlogs are depleted, it remains unclear if businesses, eager not to scare away customers, will move to raise prices.
"[T]he big wildcard remains the persistency of tariff-linked inflation -- is this a brief phenomenon that will peter out by March, or an extended process that will be placing upward pressure on prices for many quarters to come?" the Vital Knowledge analysts said.
Fed rate decision in focus
Depending on the length of the U.S. government’s closure, Friday’s inflation data may be one of the only indicators the Fed will receive as they deliberate on the path ahead for interest rates over the rest of 2025.
The central bank slashed borrowing costs by 25 basis points last month, citing a decision to priortize signs of slowing employment growth over sticky inflation. However, due to the shutdown, members of the rate-setting Federal Open Market Committee will not have the latest monthly job market report, relying instead on alternative sources, often from private companies.
Still, markets anticipate that the Fed will ultimately choose to bring rates down by a further quarter of a percentage point at its two-day meeting starting next Tuesday, followed by another drawdown of the same size at its final gathering of the year in December. According to CME’s FedWatch Tool, the chances of an October cut were all but cemented in the wake of the publication of the September consumer price index, while there is a more than 96% probability of a December cut.
Stephen Brown, Deputy Chief North America Economist at Capital Economics, said the inflation data gives the central bank the "green light to cut," adding 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."
But the Fed may face some difficult choices as it calibrates policy. In theory, lowering rates -- which are currently set at a range of 4% to 4.25% -- can help bolster investment and hiring, but aggressive reductions run the risk of igniting inflationary pressures.
U.S. stock futures were trading higher following the report, while the rate-sensitive 2-year U.S. Treasury yield and its benchmark 10-year counterpart ticked down. Yields tend to move inversely to prices.