Inflation Data and the Fed’s Looming Rate Cut: What Investors Should Watch For

October 23, 2025

|In Economy, Finance, Investments, Business

Context

Inflation data for September 2025 was delayed by a partial government shutdown, but economists and investors still expect the figures to dictate the Federal Reserve’s next steps. Consensus forecasts compiled by TradingEconomics suggest that annual headline inflation is likely to tick up to about 3.1 % in September, up from 2.9 % in August, with month‑over‑month inflation at roughly 0.4 % and core CPI rising around 0.3 %. Bank of America economist Stephen Juneau argues that if the forecasts are accurate, the data will not be a “game changer” for the Fed.

With the inflation report now expected to arrive just days before the Federal Open Market Committee (FOMC) meets on Oct. 28‑29, markets are pricing in a near‑certainty of a 25‑basis‑point rate cut, with strong odds of another cut in December. Futures markets tracked by CME’s FedWatch tool show a 99 % probability of a quarter‑point cut in October. This would continue the easing cycle that began in September 2025, the first cut since December 2024, reflecting weakening job growth and tariff‑driven inflation pressures.

What the Data Tells Us

Economists’ projections highlight several notable trends:

Headline vs. Core Inflation: FactSet expects core inflation to rise 0.3 % month‑over‑month and hold at about 3.1 % year‑over‑year, implying that the inflationary pressure is not confined to volatile food and energy prices. Analysts such as Ayesha Tariq note that energy and food costs are likely to account for much of the month’s inflation, with gasoline prices estimated to have risen 1.5 %.
Tariffs and Sticky Services Inflation: Persistent tariffs on goods like communication equipment and furnishings continue to put upward pressure on prices. Core services inflation, particularly in areas unrelated to housing, remains “sticky” at around 3.5 % year‑over‑year, well above the Fed’s 2 % target.
Cooling Rent Inflation and Flat Used‑Car Prices: Rent inflation continues to decelerate, and used‑car prices are expected to remain flat after months of drag. These categories had been major contributors to inflation earlier in the cycle, so a plateau helps the Fed’s narrative that inflation is gradually easing.
Investor Expectations: According to a survey by 22V Research, 61 % of investors believe core inflation is cooling in line with the Fed’s goals, while only 27 % think financial conditions need to tighten further. Roughly 45 % of respondents expect a risk‑on market reaction to the CPI report, whereas just 26 % expect risk‑off.

How Will the Fed Respond?

Even if inflation beats expectations, Fed Chair Jerome Powell is likely to maintain a cautious tone. Analysts expect the FOMC to cut rates but accompany the move with hawkish commentary due to uncertainties from the government shutdown and lingering tariffs. The delayed release of key economic indicators—including employment, retail sales and durable goods orders—limits the Fed’s visibility into the economy.

Should the CPI report show a softer‑than‑feared print, it could propel U.S. equities to new highs. As of Oct. 23, the S&P 500 was trading just 15 points below its record high. A dovish shift would likely boost growth stocks and high‑beta sectors, but a hawkish surprise may prompt volatility, especially in interest‑rate sensitive sectors like housing and utilities.

Implications for Investors

Stay Nimble on Rate‑Sensitive Assets: A quarter‑point cut is widely expected, but markets could still swing if inflation surprises on the upside. Investors in bonds and mortgage‑backed securities should monitor the Fed’s messaging on future cuts.
Watch the Dollar and Commodities: The U.S. dollar has been firm ahead of the data schedule, rising against major counterparts. A dovish Fed could weaken the dollar and support commodities, while a hawkish tilt may strengthen the greenback.
Look Beyond the CPI: Even with inflation cooling, the Fed remains concerned about labor market softness and geopolitical risks. Tariffs and supply‑chain disruptions still pose upside risks to prices. Investors should diversify across sectors and maintain hedges.

Bottom Line

While the delayed inflation report heightens uncertainty, market participants expect the Fed to continue cutting rates. Headline inflation around 3.1 % and core inflation near 3.1 %, combined with sticky service prices and tariff pressures, suggests the disinflation process will be gradual rather than rapid. Investors should prepare for volatility but recognize that a moderate inflation reading could be a catalyst for new market highs.