Even if tonight's CPI "surges," can it really stop the Fed's determination to cut rates?

At 8:30 p.m. on Friday in the East 8th time zone, the United States will release a long-delayed September CPI report, which may show that inflation stubbornly remains around 3%. This highlights that tariffs and the stickiness of the service sector continue to create obstacles for the Federal Reserve in achieving its 2% target.

This is also the first major federal economic data released since the U.S. government shutdown—which has now become the second-longest government shutdown in U.S. history, with no end in sight.

Economists expect the overall CPI for September to rise by 0.4% month-on-month, the same pace as in August, with the year-on-year growth rate rising to 3.1%, the highest level since May and above the 12-month average of 2.7%.

Excluding the more volatile food and energy prices, the core CPI is expected to rise by 0.3% month-on-month and 3.1% year-on-year, both unchanged from August.

Bank of America economist Steven Juneau stated in a forward-looking report released on Monday that tariffs remain a "source of goods price inflation," and this impact will persist "for the next several quarters," although the decline in used car prices has partially offset the sharp fluctuations that disrupted inflation data earlier this summer.

Juneau added that non-housing service sector inflation is expected to slow only slightly, and warned that due to the persistent stickiness of core service prices such as healthcare and transportation, this category will remain "disturbingly high."

Tariff Pressure Looms

BNP Paribas referred to the September CPI report as a "key point for assessing our baseline forecast," noting that "the risk for the September CPI data release is skewed to the downside," as weaker housing costs and relatively mild tariff pass-through in the goods sector may offset seasonal strength in other service categories. The company added, "The core CPI for September tends to be slightly below the market consensus."

Nevertheless, BNP Paribas expects tariffs to have a greater impact in the future, predicting that "more substantial pass-through will occur in September and continue into the first quarter of 2026."

The bank pointed out that "companies have taken a relatively restrained approach in passing on tariffs, with consumers bearing less than 20% of the costs," but expects firms to "increase tariff pass-through in the third and fourth quarters of 2025, shifting most of the costs to consumers by the end of the first quarter of 2026."

This focus on the timing of tariff impacts has resonated on Wall Street, with Goldman Sachs also highlighting the "tug-of-war" between softening goods prices and the ongoing impact of tariffs.

The Goldman Sachs economics team, led by Jan Hatzius, expects that the boost from rising airfares in September will weaken, and the continued softness in used car prices will offset increases in food and energy costs. Nevertheless, Goldman Sachs stated that even though "the contribution of housing and the labor market to inflation is decreasing and the underlying inflation trend is further declining," tariffs will still "continue to push up monthly inflation until early next year".

Seema Shah, Chief Global Strategist at Principal Asset Management, said that aside from this Friday's data, overall inflation risks remain tilted to the upside.

She said: "So far, the pass-through of inflation has been milder than expected, which may be the result of a combination of factors such as profit compression, advance stocking, and trade diversion. While these factors have helped cushion the initial shock, they are essentially temporary."

She added: "As inventories are depleted, trade routes narrow, and profit margins continue to shrink, companies may be forced to pass higher costs on to consumers. Therefore, upside risks remain."

In summary, this Friday's report is unlikely to change the market's expectation that the Federal Reserve will cut rates again later this month. According to the Chicago Mercantile Exchange's "FedWatch" tool, the market is nearly 100% certain that the Federal Reserve will announce a 25 basis point rate cut at next week's policy meeting.

Tyler, Head of Global Market Intelligence at JPMorgan, wrote in a report to clients on Wednesday: "We agree with the market's view and believe that it would take extreme tail risks for the Federal Reserve to stand pat."