September 2025 CPI Preview
Even if CPI were to surprise hot, the Fed is unlikely to skip upcoming rate cut
Summary: Although market participants have been starved for data, we do not expect a major surprise to come from this inflation report. Overall, the risks remain balanced in a precarious mix between tariffs pushing up goods prices and weaker aggregate demand (from slower jobs and labor force growth) applying downward pressure on both goods and services. More simply put, inflation should now be driven by tariffs vs demand destruction. Time will ultimately determine which forces prevail (in the near term), but so far, businesses have been able to absorb most of the tariff costs while wages are not rising at a speed that would push up services inflation. As it stands, it’s unclear how much profits can compress before corporations feel the need to raise prices on consumers. Because prices are generally downwardly rigid (resistant to decreases), businesses may prefer to wait until the Supreme Court’s ruling on the legality of IEEPA tariffs in November or after the holiday shopping season before making any significant pricing decisions.
Market Implication: With the government shutdown still in effect (and with a lack of official data as a result), Treasuries have been better supported, and yields have grinded lower over the past month. Rate probabilities remain close to fully pricing in two 25bp cuts over the next two Fed meetings. In our view, it seems unlikely that a hotter than expected September CPI print would significantly change market expectations for next week’s FOMC meeting. However, if the CPI print were to land above or below the range of forecasters’ expectations, we believe that the risks are skewed towards a larger selloff in short-term forward rates, which could reprice out some cuts in 2026. Meanwhile, a softer than anticipated inflation print would likely be shrugged off by markets given that a lot is priced into rates, and markets might discount a softer read as a function of data collection issues during the shutdown. If a rise in rates were to occur, we think dip buying should be focused on the belly.