Markets are eagerly awaiting September's inflation data, with the Bureau of Labor Statistics set to release the Consumer Price Index (CPI) report on Thursday.

The unexpected rise in September's Producer Price Index (PPI) has heightened anticipation for the upcoming consumer inflation index, especially with the Federal Open Market Committee (FOMC) meeting scheduled for Oct. 31-Nov. 1.

Nevertheless, market expectations appear firmly anchored regarding future interest rates. Fed futures pricing implies a 92% chance of no rate change next month and a 72% chance of no change in December, according to the CME FedWatch Tool.

September CPI Report: What Are Economists Expecting?

Economists largely anticipate modest readings for September's CPI report:

• The headline inflation rate is projected to decrease from August's 3.7% annual rate to 3.6% in September.
• On a monthly basis, the headline CPI is expected to rise by 0.3%, a decrease from the previous month's 0.6%.
• Core inflation, which excludes energy and food, is forecasted to decline from August's 4.3% annual rate to 4.1% in September, marking the lowest core CPI reading since September 2021.
• On a monthly basis, core CPI is anticipated to advance at a 0.3% pace, maintaining the same trend as August.

Goldman Sachs economists Manuel Abecasis and Spencer Hill anticipate a 0.22% increase in core CPI for September (compared to the consensus of 0.3%), resulting in a year-over-year rate of 3.98% (versus an expected 4.1%). They expect the headline CPI to be marginally softer than consensus at 3.55% year-on-year (versus 3.6% expected).

Goldman predicts that monthly core CPI inflation will remain in the 0.2-0.3% range in the coming months, reflecting moderation in shelter inflation and used car prices. However, this may be partially offset by a positive swing in the CPI's health insurance component when the BLS incorporates new data and a methodological change next month. Their forecast indicates year-over-year core CPI inflation of 3.8% in December 2023 and 2.9% in December 2024.

How Did The Market React To Previous Inflation Report?

The August inflation report, released on Sept. 13, exceeded estimates, with the CPI index at 3.7% year-on-year versus an expected 3.6%. However, the core gauge matched estimates at 4.3% year-on-year.

Traders interpreted the rising inflation as primarily driven by transient energy costs, which did not significantly impact their risk sentiment.

Despite the higher-than-expected August CPI report, the stock market was in the green that day, with the SPDR S&P 500 ETF Trust (SPY  ) up 0.1% and the tech-heavy Invesco QQQ Trust (QQQ  ) showing gains of 0.4%.

The U.S. dollar gauge, tracked by the Invesco DB USD Index Bullish Fund ETF (UUP  ), was up 0.1%, while long-term bond yields remained unchanged, with the iShares 20+ Year Treasury ETF (TLT  ) holding steady.

Growth-linked sectors outperformed, with the Consumer Discretionary Select Sector SPDR Fund (XLY  ) rising 0.8% and the Communication Services Select Sector SPDR Fund (XLC  ) up 0.3%.