CPI Preview: Will inflation rear its head?

The upcoming U.S. Consumer Price Index (CPI) report for September is set to be a closely watched event, with economists predicting modest inflation readings. Economic data has come in stronger than expected which has investors watching to see if inflation will rear its ugly head once again.

The consensus forecast expects a headline CPI to rise by 0.1% month-over-month (MoM), down from 0.2% in August, and to show a year-over-year (YoY) increase of 2.3%, cooling from 2.5%. For Core CPI, which excludes food and energy prices, expectations are set at 0.2% MoM, compared to 0.3% in the prior month, while the YoY figure is expected to hold steady at 3.2%. These estimates suggest a continuation of the gradual slowdown in inflationary pressures observed in recent months.

Key categories to watch in this report include shelter, used cars, medical care services, and food prices, as they can significantly impact the inflation outlook. Shelter, which has been a substantial contributor to the CPI, is expected to show signs of cooling, with rent and owners' equivalent rent (OER) potentially coming in lower after previous months of elevated readings. Used vehicle prices are anticipated to decline again, following their recent trend, which could further relieve some inflationary pressure. Meanwhile, medical care services might see a modest rise, reversing last month’s anomaly, and auto insurance remains a volatile factor with the potential to swing the core CPI reading.

Updates on housing inflation will be critical, as the rent and OER components are gradually moving towards more moderate levels. These indexes have been among the most "sticky" inflation drivers in recent months due to their lagging nature, but there are expectations for them to align more closely with market trends, showing a possible decline to around 0.3% for rent and 0.4% for OER. A slowdown in these areas would be a positive sign for the broader inflation outlook, potentially signaling a return to pre-pandemic rates.

Analysts will also be paying attention to "sticky" inflation readings, which are influenced by wage growth and service-sector price changes. While stronger wage growth, particularly in managerial roles, poses a risk of persistent services inflation, other data like the Employment Cost Index and the Atlanta Fed's wage tracker will be crucial in assessing the long-term trajectory. If wage pressures remain elevated, it could complicate the Federal Reserve's efforts to bring inflation closer to its 2% target.

A hotter-than-expected CPI reading could have significant market implications, potentially leading to a repricing of interest rate expectations. Currently, the market anticipates an 84% chance of a 25-basis-point rate cut at the next Federal Reserve meeting in November. However, a strong inflation report could diminish the likelihood of this cut, limiting the Fed’s flexibility and raising concerns about the pace of future monetary easing.

On the other hand, a cooler-than-expected CPI print could reinforce the narrative of a steady decline in inflation, supporting the case for continued rate cuts by the Federal Reserve. Such a scenario would likely lead to positive reactions in equity markets, with investors gaining confidence in the Fed’s ability to manage inflation without aggressively tightening monetary policy. It could also strengthen the argument for a soft landing in the U.S. economy, reducing fears of an economic slowdown.

Overall, the September CPI report represents a pivotal moment for both the economy and financial markets. Given its timing ahead of the next Fed meeting, the data will play a crucial role in shaping monetary policy expectations and could influence broader market sentiment. Investors and traders will be watching closely to see if the report confirms the ongoing trend of easing inflation or signals a resurgence that could prompt the Fed to reassess its rate-cutting plans.