The September Consumer Price Index (CPI) report, set to be released on Thursday, Oct. 10 at 8:30 a.m. ET, will play a pivotal role in shaping the Federal Reserve's next move ahead of its Nov. 7 meeting.

Economists anticipate further cooling inflation, largely driven by falling energy prices. However, core inflation — which excludes volatile energy and food prices — remains a key focus and will be closely monitored for signs of stickiness and its potential Fed policy implications.

Traders are currently pricing in an 87% chance of a 25 basis point rate cut, with the remaining 13% now betting on no rate cut at all. The latter probability has been rising in recent days due to the stronger-than-expected September jobs report and the impact of rising oil prices driven by escalating tensions in the Middle East.

Key Expectations for the September CPI Report

• Headline inflation is expected to ease to 2.3% year-over-year, down from 2.5% in August, marking the lowest rate since February 2021.
• On a monthly basis, headline inflation is forecast to slow to 0.1%, down from 0.2% in August.
• Core inflation, which excludes volatile food and energy prices, is expected to hold steady at 3.2% year-over-year.
• Monthly core inflation is projected to decelerate slightly from 0.3% in August to 0.2% in September.

Economist Views

A key factor contributing to the expected decline in headline inflation is the ongoing drop in energy prices, according to Joe Brusuelas, chief economist at RSM US.

He expects both headline and core CPI to rise 0.1% month-over-month, translating to a 2.3% year-over-year increase for the headline CPI and a 3.1% rise in core inflation, with the latter slightly below consensus.

Brusuelas added that while energy prices are falling, shelter and services prices remain sticky, likely keeping inflation from decelerating too quickly.

Similarly, Bank of America economist Stephen Juneau echoed these sentiments, forecasting headline CPI to rise 0.1% month-over-month due to a decline in energy prices. However, sticky rents and an uptick in used car prices are expected to keep core inflation firm at 0.3% month-over-month, consistent with recent trends in shelter costs and consumer goods pricing.

Goldman Sachs economist Jessica Rindels instead expects shelter inflation to moderate in September after recent sharp increases, forecasting a 0.35% rise in owners' equivalent rent and a 0.31% increase in primary rent. Meanwhile, they also foresee firm increases in car insurance prices as premiums continue to rise, though at a slower pace than in previous months.

Goldman Sachs is projecting a 0.3% increase in core CPI for September, slightly above the consensus estimate of 0.2%, translating to a 3.2% year-over-year increase. For headline CPI, they expect a 0.1% month-over-month rise and a 2.3% year-over-year increase, aligning with consensus.

Market Reactions: Stakes Are High

The importance of Thursday’s CPI report has escalated following last week's robust jobs data.

Bank of America analysts noted the options market is now pricing in a 109 basis point move in the S&P 500 on Thursday, which would be the largest CPI-related market move since May. This is a significant jump from last week's 91 basis point expectation and well above the three-month average move of 70 basis points.

On Tuesday, the S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust SPY, traded at about half a percentage point off its all-time highs.

As long as inflation continues to trend downward, analysts at Bank of America believe “good news will remain good news for stocks.”

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