The US economy is sending mixed signals as accelerates while labor market data shows signs of cooling. These trends complicate the Federal Reserve’s upcoming , as policymakers weigh the risks of cutting rates too aggressively against the backdrop of tariff-driven price pressures and a weakening job market.
Inflation Trends: Gradual but Persistent
rose 2.9% year-over-year in August, up from 2.7% in July and marking the highest level since early 2025. , which excludes food and energy, climbed 3.1%, aligning with expectations but underscoring persistent inflationary pressures.
- Goods and Services Impact: Tariffs on imported goods have driven broad-based price increases, particularly for clothing, vehicles, and some household items. However, price growth in other sectors, such as furniture and tires, has been more muted, suggesting that retailers are strategically pacing cost pass-throughs.
- Food Inflation: Grocery prices surged 0.6% month-over-month, with coffee up 21%, beef steaks 17%, and apples 10% over the past year. Consumers are still grappling with cumulative inflation from the pandemic and 2021–22 price surges.
Labor Market Cooling
A simultaneous rise in to their highest level since October 2021 and slower growth signals that the once-resilient labor market is losing momentum. The has drifted higher in recent months, highlighting an economy transitioning from “slow-to-hire, slow-to-fire” dynamics to a more cautious labor environment.
This combination—softer hiring alongside persistent price growth—has revived stagflation concerns. Economists warn that if wage pressures rise in response to tariffs, inflation could become more entrenched, complicating the Fed’s ability to ease policy without fueling another inflation cycle.
Market Response: Optimism Despite Mixed Data
Despite the gloomy labor picture, U.S. stocks rallied, with all three major indexes approaching record highs. Investors are pricing in multiple rate cuts over the next few meetings, starting with the expected September decision. Bond markets signal confidence that inflation will moderate, while equity markets are buoyed by expectations of looser financial conditions.
However, volatility risk remains elevated. If inflation proves stickier than forecast or unemployment accelerates sharply, the Fed’s policy path may diverge from investor expectations, triggering repricing across asset classes.
Trade Policy: The Inflation Wildcard
President Trump’s broad tariffs remain a key inflation driver. While the White House argues that tariffs will make the U.S. wealthier without a significant inflationary impact, the data tells a nuanced story:
- Retailers are absorbing some cost increases but cannot fully shield consumers indefinitely.
- Global supply chains are adjusting, but sourcing diversification adds cost pressures.
- Price dispersion between goods categories shows that tariffs’ effects are uneven but persistent.
Key Economic Indicators
Metric | August 2025 | July 2025 | Trend vs. Spring 2025 | Notes |
Headline CPI (YoY) | 2.9% | 2.7% | ↑ from 2.3% in April | Highest since Jan 2025 |
Core CPI (YoY) | 3.1% | 3.1% | Stable | Excludes food & energy |
Unemployment Claims (Weekly) | Highest since Oct 2021 | — | Rising | Indicates labor softening |
Food Prices (MoM) | +0.6% | -0.1% | Accelerating | Coffee +21% YoY; Beef +17% YoY |
Major Equity Indexes | Near record highs | — | Strong momentum | Fed cut expectations priced in |
Tariff-Exposed Goods Inflation | Mixed | — | Gradual increases | Cost pass-through in phases |
Scenarios: Bullish Vs. Bearish
Bullish Case:
- Inflation eases in Q4 as tariff effects normalize and supply chains adapt.
- Rate cuts stabilize growth, boost consumer confidence, and support corporate earnings.
- Equity markets extend gains, with growth sectors benefiting from lower borrowing costs.
Bearish Case:
- Inflation proves stickier, forcing the Fed to pause or slow rate cuts.
- Rising unemployment reduces consumer spending, triggering an earnings slowdown.
- Persistent trade tensions exacerbate supply-side inflation, risking a stagflationary environment.
Investment Takeaways
Investors face a complex macro backdrop:
- Diversification Is Key: Balancing equity exposure with inflation-protected securities (TIPS) or commodities offers protection against policy surprises.
- Consumer Discretionary Risk: Rising grocery and essentials prices strain household budgets, potentially hurting discretionary spending.
- Opportunities in Fixed Income: Anticipated rate cuts create opportunities in duration-sensitive bonds, though caution is warranted if inflation persists.
- Watch PCE Data: The upcoming Personal Consumption Expenditures () index could validate or challenge CPI trends, influencing Fed rhetoric.