Viewpoint

October 10, 2025 | 15:54

Do We Need to Start Worrying About Inflation Again?

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Our Thoughts

Do We Need to Start Worrying About Inflation Again?

Week two into the federal government shutdown and the economic fog is thickening just as the Fed contemplates another quarter-point rate cut on October 29. We still await almost all the major economic indicators for September (employment, inflation, retail sales, and industrial production) that would help get a read on how the third quarter was likely to shape up. The data from July and August weren’t much help in reading the economy’s tea leaves, revealing surprising resilience in consumer and business spending. Record-high stock prices and AI investment mania allowed high-income consumers and most investors to look past the warts of new tariffs at the same time the labor market signaled growing signs of distress. Last week, we raised our Q3 GDP growth estimate to a hardy 2.8% annualized. If realized, it would be the second consecutive quarter of above-potential growth. With core CPI inflation still well above 3% (Chart 1) and likely to move higher in the months ahead, this begs the question: do investors and the Fed need to start worrying about inflation again? It’s a question that needs to be taken seriously.

Fixed income investors have long abandoned their tariff inflation concerns, assuming economic and labor market weakness will soon take care of the problem (Chart 2). That is largely our baseline view too, but the risk of sustained inflation above the Fed’s 2.0% target remains very real, especially if growth and inflation expectations remain elevated. One uncomfortable reality is consumer inflation expectations don’t appear to be as well-anchored as investors’. The New York Fed’s Survey of Consumer Expectations for September, released earlier this week, showed a two-tick increase in the median one-year inflation expectation to 3.4% and a one-tick increase in the three-year outlook to 3.1%. Consumers’ one-year ahead commodity price expectations are telling: medical care inflation expectations at 9.3%, college and rent both at 7.0%, food at 5.8%, and gasoline at 4.2% (Chart 3). A broad commodity futures price index from Bloomberg has risen 8.2% since its April 7 low with big increases in silver, gold, copper, cattle, and lumber prices over the past month, outdistancing continued declines in crude oil, gasoline, and natural gas prices.

A lot of our sanguine inflation forecasts for 2026 and beyond rest on renewed labor market weakness and slower economic growth being prolonged, with overall tariffs remaining near current levels. If the recent slowdown in job growth turns out to be more supply-driven than demand-driven, or the Administration keeps adding new sector tariffs to the mix, and the Federal Reserve continues to ease into a slowdown, we could once again be surprised by the resilience of consumer price inflation.

The September CPI will be delayed by a week; but for what it’s worth, we estimate another uncomfortably ‘hot’ reading on both the headline and core CPI inflation rate at 0.38% and 0.32% respectively, with both year-on-year measures clocking in at an uncomfortable 3.1%. Given the uncertainties of the near-term growth and inflation outlook, the FOMC—while leaning toward additional rate cuts this year and next—may still find itself needing to pivot toward a more hawkish stance next year. Investors once again could find themselves surprised by resilient inflation.

Filling the Data Void

Economists, investors and policymakers are still flying somewhat blind from a data perspective during this government shutdown. As such, we’re putting more weight on alternative sources of information to fill the gap. The table below is a quick snapshot of some of the better available indicators on the job market, inflation and growth.

A few quick takeaways:

Combining various alternative job market reports paints a pretty clear picture that softness continued through September, even without the official BLS data points. And, given this is part of the Fed’s dual mandate, it helps maintain a dovish near-term tilt.

Some federal workers will reportedly be recalled to produce the all-important CPI report (Oct. 24). In the event that report can’t go ahead, the takeaway so far for September is some ongoing inflation stubbornness.

Some growth and spending data (e.g., auto sales, ISMs) are important indications of spending and GDP; others do a poorer job of matching short-term movements in the official data. However, most of these will mark major changes or turning points in the broader cycle even if they’re not all that meaningful month-tomonth. Through September, growth and spending trends appeared to be largely stable.

Despite the data void, pre-shutdown momentum and ongoing indications of labour market softness should push the Fed to cut rates again later this month.