US CPI Preview: Inflation Set to Rise – Why the Fed Won’t Care (Much)

US CPI KEY TAKEAWAYS:

• US CPI expectations: 3.1% y/y headline inflation, 3.1% y/y core inflation
• This month’s CPI report is unlikely to lead to any seismic shifts in markets as traders remain focused on US-China trade developments and the lingering US Government shutdown.
• The near-term bias on the US Dollar Index will remain to the topside as long as it holds above the mid-96.00 area, with the next resistance levels to watch at 99.50 and 100.00.

When is the US CPI report?

The US CPI report for September will be released at 8:30ET (12:30 GMT) on Friday, October 24.

What are the US CPI Report Expectations?

Traders and economists are projecting both headline and core (ex-food and -energy) CPI to come in at 3.1% y/y. This reading, if seen, would mark a rise in headline inflation from last month’s 2.9% reading and a steady core print relative to last month.

US CPI Forecast

The US government may be trending toward its longest shutdown in history, but the diligent employees of the Bureau of Labor Statistics are nonetheless working without pay to deliver the September CPI report – hats off to them!

While the effort of the BLS employees is admirable, this month’s CPI report is unlikely to lead to any seismic shifts in markets. In the current environment, traders are more focused on developments on the US-China trade front – US Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng are poised to meet in Kuala Lumpur to set the stage for next week’s highly-anticipated meeting between Presidents Trump and Xi – and any progress on re-opening the US government.

If there was any doubt about what the Federal Reserve would do at its meeting next week (and in all likelihood, again at its meeting in December), the flare-up of trade tensions and lingering shutdown have FOMC members unanimously expecting to cut interest rates by 25bps, and its hard to see a single month’s inflation reading changing that meaningfully.

Broadly speaking, US consumer inflation has seen its decline toward the Fed’s 2% target stall for more than a year now, with headline CPI readings stuck between the 2.3% and 3.0% y/y range for that period. Meanwhile, Core CPI, which filters out more volatile food and energy prices to better show the underlying trend in prices, has turned higher in recent months after dropping as low as 2.8% y/y earlier this year.

Despite a prolonged period of above-target inflation, the Fed’s concerns about the jobs market are more urgent, and as a result, traders have essentially fully discounted a 25bps rate cut to below 4.00% next week:

Source: CME FedWatch

As many readers know, the Fed technically focuses on a different measure of inflation, Core PCE, when setting its policy, but for traders, the CPI report is at least as significant because it’s released weeks earlier. As we noted above, CPI has generally ticked lower so far this year, but it remains stubbornly above the Fed’s 2% target:

Source: TradingView, StoneX

Looking at the chart above, the “Prices” components of the PMI reports have started to edge lower in recent months, but inflation nonetheless remains below where those readings would historically imply. Despite signs of slowing economic growth, firms are having to pay up for goods and services amidst the ongoing uncertainty around trade policy, potentially putting upward pressure on the CPI report in the coming months.

US Dollar Index Technical Analysis – DXY Daily Chart

Source: TradingView, StoneX

Even with traders increasing confidence that the Fed will continue to cut interest rates through at least the rest of the year, the US dollar is showing signs of turning higher. As the chart above shows, the US Dollar Index (DXY) has carved out a series of three “higher lows” since forming a potential double bottom near 96.40 midway through last month.

Moving forward, the near-term bias on the US Dollar Index will remain to the topside as long as it holds above previous-resistance-turned-support and the 100-day MA in the mid-96.00 area, with room to test the monthly and/or 4-month highs at 99.50 and 100.00 even next. A hotter-than-expected CPI report would help this bullish case at the margin, whereas a soft inflation reading could still be seen as a buying opportunity for the greenback as long as it holds the 100-day MA.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX