Everyone is waiting for Friday's big inflation report. Here's what to expect

The upcoming September Consumer Price Index (CPI) report is anticipated to be a significant market mover, largely due to a scarcity of other economic data resulting from the government shutdown, which also raises concerns about data reliability. While consensus expects CPI to largely align with recent trends (0.4% monthly all-items, 0.3% monthly core), any deviation, particularly an upside surprise, could challenge market expectations for the Federal Reserve's widely anticipated interest rate cut next week. Investors will closely scrutinize the report for inflation trends and the impact of tariffs, as a hotter-than-expected reading could introduce volatility and potentially alter the Fed's policy outlook.

Analysis

The upcoming September CPI report is poised to be a significant market mover, primarily due to a dearth of other economic data resulting from the government shutdown. This scarcity amplifies the potential impact of even minor deviations from consensus, which anticipates a 0.4% monthly all-items increase and a 0.3% core CPI monthly increase, largely consistent with August. The annual inflation rate is projected at 3.1%, 0.2 percentage points higher than August, with core CPI also at 3.1% annually.

Any significant upside surprise in these figures could challenge market expectations for the Federal Reserve's widely anticipated quarter-point interest rate cut next week. Goldman Sachs analysts project tariffs to add only 0.07 percentage points to core inflation, with mixed impacts on specific categories. However, the government shutdown has raised concerns about the overall clarity and reliability of the data, as noted by Morgan Stanley.

Despite data reliability concerns, the report will be crucial for assessing inflation trends and tariff impacts amidst geopolitical uncertainty and robust economic growth, with Q3 GDP tracking near 4%. A hotter-than-expected CPI could introduce volatility, though some strategists view such a scenario as a potential buying opportunity given strong EPS growth and the Fed's cutting cycle. Barclays suggests a meaningful upside surprise is needed to alter rate cut expectations.

Key Decisions for Investors

• Monitor the September CPI report closely for any significant deviations from the 0.4% monthly all-items and 0.3% monthly core inflation consensus, as even slight surprises could trigger market volatility.
• Assess the implications of the CPI data on Federal Reserve policy, as a materially hotter-than-expected reading could challenge the market's expectation for an interest rate cut next week.
• Consider potential buying opportunities if CPI comes in higher than expected, particularly if underlying economic fundamentals like strong EPS growth and the Fed's cutting cycle remain robust.
• Factor in the uncertainty surrounding data reliability due to the government shutdown when interpreting the report's findings and their potential market impact.