The U.S. government shutdown has extended into its fourth week, marking the second-longest shutdown in U.S. history and leaving Wall Street in a state of "data famine." The U.S. Consumer Price Index (CPI) data, which has been postponed due to the government closure, is set to be released, but this pivotal report may have missed its optimal timing to impact the market.

At 8:30 AM Beijing time on Friday, the U.S. will release the CPI report for September, with market expectations as follows:

- The overall CPI is stubbornly maintaining around 3%, with a month-on-month increase of 0.4% and a year-on-year rise of 3.1%, reaching the highest level since May and exceeding the average of 2.7% over the past 12 months; - The core CPI, excluding food and energy prices, is expected to rise 0.3% month-on-month while remaining unchanged year-on-year at 3.1%.

Goldman Sachs anticipates that the core CPI will grow by 0.3% month-on-month, slightly below market expectations. Tariff pressures are expected to drive up prices in categories such as communications, household goods, and entertainment, but the overall inflation trend remains downward.

Importantly, the inflationary pressure from tariffs and the stickiness of service sector prices are complicating the Federal Reserve's path to returning to its 2% inflation target. Several Wall Street institutions have warned that while corporations have so far passed on less than 20% of tariff costs to consumers, a larger-scale price transfer may accelerate in the coming quarters as inventory diminishes and profit margins continue to narrow.

However, even if this data exceeds expectations, it is unlikely to fundamentally alter the market's perception of the Federal Reserve. Given the weak labor market, a gradual interest rate cut is almost certain, with the market anticipating a near 100% chance that the Fed will cut rates by 25 basis points at next week's meeting.

Cooling Trend of Inflation Excluding Tariffs

Forecasts for the core CPI vary among institutions, ranging from a low of 0.2% (predicted by 7 analysts) to a high of 0.4% (predicted by 5 analysts), while 64 forecasts indicate 0.3%.

Goldman Sachs' economic team expects that weaker airline fare effects and continued softness in used car prices will offset the impact of rising food and energy costs. Specifically, Goldman anticipates little change in auto prices, a 0.3% increase in auto insurance, and a 1.5% decline in airline fares.

The tariff effect is expected to contribute about 0.07 percentage points to core inflation, primarily in tariff-sensitive categories such as communications equipment, household goods, and entertainment. Goldman predicts that tariffs will continue to elevate monthly inflation figures in the coming months, with core CPI growth rates remaining in the range of 0.2% to 0.3%.

However, once the tariff impact is excluded, underlying inflation pressures are diminishing. Goldman analysts highlight that contributions from housing rents and the labor market to inflation are shrinking, providing a fundamental basis for overall disinflation. This view aligns with the Fed's recent focus on labor market risks.

Uncertainty in Tariff Transmission Path

The timing and extent of tariff transmission to consumer prices are the focal points for Wall Street institutions, but opinions vary significantly.

BNP Paribas points out that the September CPI is a "critical checkpoint for reviewing our benchmark forecasts," expressing that "the risks surrounding the September CPI release tend to lean downward," as milder housing costs and only moderate transmission of goods tariffs could offset seasonal gains in other service categories. The bank adds that the core CPI readings "often fall slightly below consensus expectations" in September.

However, BNP Paribas expects future tariff impacts to be more pronounced, predicting "more substantial transmission to occur in September and persist through the first quarter of 2026." The bank notes that "companies have adopted a relatively restrained approach to passing on tariffs, with consumers bearing just below 20% of the costs," but anticipates that companies will "intensify tariff transmission in the third and fourth quarters of 2025, ultimately transferring most costs to consumers by the end of the first quarter of 2026."

Citi forecasts that the U.S. core CPI will rise by 0.28% in September, lower than August's 0.35%, due to milder housing inflation offsetting tariff-driven price pressures. The bank believes that weakening conditions in the labor and housing markets are diminishing inflation risks, supporting expectations for further easing by the Fed.

Seema Shah, Chief Global Strategist at Principal Asset Management, stated that, thus far, inflation transmission has been milder than expected, possibly due to a combination of shrinking margins, pre-stockpiling inventory, and trade shifting. While these factors have helped buffer initial impacts, they are essentially temporary. "As inventories deplete, trade routes narrow, and margins continue to contract, companies may be forced to pass higher costs onto consumers. Thus, upside risks remain."

CPI Unlikely to Disrupt Fed's Rate Cut Path, Market Fixated on Mid-Term Risks

Despite the significance of inflation data, Friday's report is unlikely to change the market's expectations regarding another rate cut by the Fed later this month. According to the CME FedWatch tool, the market is anticipating a near 100% certainty that the Fed will cut rates by 25 basis points at next week's policy meeting. Current monetary market pricing indicates a reduction of 54 basis points before the year ends, equivalent to fully absorbing two rate cuts of 25 basis points each.

Julien Lafargue, Chief Market Strategist at Barclays Private Bank, remarked that it would take a significantly positive surprise for the market to revise its views on additional rate cuts.

Stephanie Link, Chief Investment Strategist at Hightower Advisors, suggested that if the figures exceed expectations, volatility is likely to occur. She would view it as a buying opportunity, given the strong economy, the Fed entering a rate-cut cycle, and double-digit earnings growth, with the fourth quarter typically being the strongest of the year.

Citi anticipates that with weakening labor and housing markets, inflation risks are decreasing, thereby supporting further easing by the Fed. Analysis from Goldman Sachs’ trading division indicates that concerns over tariffs and credit have predominantly influenced the market in recent weeks. Since early October, market growth expectations have been slightly adjusted downwards, but a more sustained dynamic is the market's dovish shift towards the Fed. Nonetheless, the impetus for pricing in more easing is primarily the weak labor market rather than the inflation landscape, making this CPI data less likely to be decisive.

Recent Fed meeting minutes show that officials are divided on monetary policy due to differing views on inflation and labor markets. Most officials agree that employment is weakening, providing justification for further rate cuts, while some noted inflation risks. Overall, officials consider the impact of inflation is waning and expect a return to the 2% target.

Additionally, Joe Clyne from Goldman Sachs’ volatility trading team noted that even on the eve of the CPI release, volatility levels remain elevated, with VIX futures trading around 20. As significant events loom, such as trade relations, next week's FOMC meeting, private credit concerns, and earnings season for tech giants, the relevance of the CPI data further diminishes.