A modest increase in the core reading of US consumer price inflation data next week could quash any remaining expectations of an interest rate rise from the Federal Reserve in October and may damp forecasts for a December raise, too.
On Wednesday, the Bureau of Labor Statistics is expected to report that headline inflation rose to 3.7 per cent in September from 3.4 per cent in August, according to a Reuters poll of economists. The core measure, which strips out the volatile food and energy sectors, is expected to rise modestly to 2.5 per cent from 2.4 per cent previously.
The Iran war has kept energy prices stubbornly high, resulting in stickier than expected inflation in August and a subsequent rate rise from the Fed at its September meeting. Brent crude, the international oil benchmark, has not fallen below $100 a barrel since the start of September and is likely to be the primary driver of headline inflation in next week’s report.
Despite the modest rise expected in core inflation, analysts do not expect it to make the case for tighter monetary policy. Multiple members of the Fed’s voting panel have indicated in recent weeks that the central bank is in no rush to raise rates. Governor Chris Waller said this week that, while additional increases would be necessary, the Fed had “flexibility” in its timing.
“A modest increase in September core CPI would all-but-solidify policy rates remaining unchanged in October, but would still be an important input into a continued slowing trend of inflation. We think further modest monthly inflation readings will have officials keeping rates unchanged in December as well,” wrote economists at Citi.
Traders in the futures market are pricing in just a 19 per cent chance that the Fed will raise rates in October. A quarter-point increase by its December meeting is currently fully priced in. Kate Duguid
How resilient is the UK economy?
Investors will closely scrutinise UK GDP figures for August on Thursday to assess how well activity is holding up against high energy prices and borrowing costs.
Economists polled by Reuters expect GDP to be unchanged in August after robust 0.4 per cent growth in July, which was boosted in part by volatile sectors such as hospitality, seen slowing down in August after the football World Cup lifted spending earlier in the summer.
The Office for National Statistics will also revise its monthly GDP estimates so far in 2026, potentially reshaping the picture of economic growth and influencing market expectations for Bank of England interest rates. Signs of continued economic resilience could reinforce expectations that the central bank will raise interest rates by a quarter of a percentage point in November.
Even a modest monthly contraction, accompanied by minor revisions, would leave the broader picture of resilience largely intact, analysts say, despite the conflict in the Middle East being now in its eighth month and continuing to push up energy prices and borrowing costs.
Economic growth averaged 0.5 per cent in each of the first two quarters of this year, and is likely to have continued at 0.4 to 0.5 per cent in the third quarter, according to Thomas Pugh, chief economist at consulting firm RSM UK.
But “the outlook beyond the summer is more difficult”, he noted.
Annual inflation, which was 3.1 per cent in August, is expected to climb to about 4.5 per cent early next year, while rising unemployment and higher mortgage rates are set to squeeze household finances. Uncertainty ahead of the Budget on October 28 could also damp activity in the final quarter of the year.
Taken together, these pressures are likely to leave UK economic growth “at little more than a crawl in Q4 and into the new year”, Pugh said. Valentina Romei
Is disinflation entrenched in China?
China will release inflation and trade data on Wednesday, offering the latest look into how Asia’s largest economy is handling deflationary pressures while the rest of the world struggles to contain price rises from the Iran war energy shock and higher borrowing costs from the recent bond sell-off.
The Chinese economy has been battling disinflationary pressures since around 2023, with the consumer price index falling 0.3 per cent year-on-year in July of that year.
A collapse in China’s real estate market has hurt consumer confidence and dented long-term credit demand, with new bank loans shrinking by the largest amount on record in July. Consumer confidence has been weak, with the official National Bureau of Statistics indicator having been below 100 — meaning respondents are feeling pessimistic — since April 2022.
As part of its economic targets for this year, Beijing aimed for the CPI to hit around 2 per cent but it is unlikely to reach that goal. The latest CPI reading in August was 0.8 per cent and the median forecast from a Bloomberg poll of economists is for the September reading to hit 1 per cent.
Although China is rapidly building AI infrastructure, the build-out is not fuelling inflation as it is in the US because the country does not face the same bottlenecks in areas such as power supply. Yields on 10-year Chinese government bonds remain stubbornly low, trading around 1.68 per cent, having defied a deep sell-off in global bond markets.
“We believe the most inflationary phase of China’s AI-related infrastructure and power build-out is likely behind us,” Barclays analysts wrote in a recent note. “Years of investment in energy, grid and digital infrastructure have left China relatively well positioned to accommodate growing AI-related demand.”
While domestic demand is weak, China’s economy is benefiting from a surge in demand for AI products such as printed circuit boards and optical transceivers that Chinese manufacturers excel at producing in large quantities. Economists polled by Reuters expect exports to rise 25 per cent in September, with the trade surplus at $117bn after $120bn in August.
Policymakers have looked to shore up growth going into the final quarter to ensure the country hits its target for economic growth of 4.5 to 5 per cent for the year. William Sandlund