Weekly Update 08/15/2025: Inflation Data Paints a Mixed Picture

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Domestic Economic News

Underlying US inflation accelerated in July to the strongest pace since the start of the year, though a tepid rise in goods prices tempered concerns about tariff-driven price pressures. The core consumer price index, excluding the often volatile food and energy categories, increased 0.3% from June, according to the Bureau of Labor Statistics data out Tuesday. That was in line with economists’ forecasts. On an annual basis, it picked up to 3.1%. Traders increasingly bet that the Federal Reserve will cut interest rates next month. The pickup in the core CPI was fueled by services prices. Excluding energy, they climbed the most since the start of the year. Airfares jumped by the most in three years, while medical care and recreation also advanced. Goods prices, excluding food and energy commodities, rose at a tame pace. Some categories exposed to tariffs, such as toys, sporting goods and household furnishings and supplies, continued to increase, albeit at a slower pace than the prior month. The reacceleration in services costs, after months of more subdued prints, underscores the lingering difficulties in taming inflation. Economists and policymakers have been largely concerned about goods prices given President Donald Trump’s sweeping tariffs, but consumer demand risks augmenting services inflation. A sustained pickup in services prices would pose an additional challenge to Fed policymakers as they debate whether tariffs will lead to more enduring inflationary pressure in merchandise. Officials have left rates unchanged this year as they seek more conviction as to how tariffs will impact inflation.

One of the key drivers of inflation in recent years has been housing costs — the largest category within services. Shelter prices rose 0.2% for a second month, reflecting steady housing costs and a continued decline in prices of hotel stays. Another services gauge closely tracked by the Fed, which strips out housing and energy costs, climbed 0.5%, one of the strongest paces since the start of 2024. While central bankers have stressed the importance of looking at such a metric when assessing the overall inflation trajectory, they compute it based on a separate index. That measure — known as the personal consumption expenditures price index — doesn’t put as much weight on shelter as the CPI. After months of chaotic threats and reversals, higher tariff rates for almost all countries began last week. That may keep pressure on inflation readings going forward, even as Trump continues to negotiate with some major trading partners like China. Some companies have been holding off on price increases for fear that consumers will pull back on spending. Central bankers also pay close attention to wage growth because it can help inform expectations for consumer spending — the main engine of the economy. A separate report Tuesday that combines the inflation figures with recent wage data showed that real average hourly earnings climbed 1.4% from the year before, rebounding from June.

US wholesale inflation accelerated in July by the most in three years, suggesting companies are passing along higher import costs related to tariffs. The producer price index increased 0.9% from a month earlier, the largest advance since consumer inflation peaked in June 2022, according to a Bureau of Labor Statistics report out Thursday. The PPI rose 3.3% from a year ago. Services costs increased 1.1% last month — the most since March 2022. Within services, margins at wholesalers and retailers jumped 2%, led by machinery and equipment wholesaling. Goods prices excluding food and energy rose 0.4%. The report indicates companies are adjusting their pricing of goods and services to help offset costs associated with higher US tariffs, despite the softening of demand in the first half of the year. Stock-index futures declined and Treasury yields rose after the wholesale inflation data was released on Thursday. The extent to which companies pass the burden from tariffs on to consumers will be key in defining the path of interest rates. While Federal Reserve officials generally expect import levies to push inflation higher in the second half of the year, they’re divided over whether it will be a one-time adjustment or more enduring. With consumer price data earlier this week pointing to a milder pass-through in July, and the labor market now shifting to a lower gear, Fed officials are widely expected to lower borrowing costs when they meet next month. However, the firm wholesale inflation data may give some policymakers pause on concerns that price pressures are rearing back up again.

“The question for policymakers, still to be resolved, is how much of these price increases are absorbed by wholesalers, retailers and resellers,” Carl Weinberg, chief economist at High Frequency Economics, said in a note. “This report is a strong validation of the Fed’s wait-and-see stance on policy changes.” Economists pay close attention to the PPI report because some of its components are used to calculate the Fed’s preferred measure of inflation — the personal consumption expenditures price index. While health care categories came in soft, airline passenger services and portfolio management jumped. The latter was largely expected due to a rising stock market. The BLS data showed food prices accounted for 40% of the advance in final goods costs, largely due to vegetables. A less-volatile PPI metric that excludes food, energy and trade services also rose from a month earlier by the most since 2022. The PPI report showed the costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, jumped 0.8% — the most since the start of the year and largely due to diesel fuel.

Applications for US unemployment benefits edged lower last week, suggesting employers remain reluctant to lay off workers. Initial claims decreased by 3,000 to 224,000 in the week ended Aug. 9, which was about in line with economists’ forecasts. Businesses have pared back on hiring new employees amid economic uncertainty driven by President Donald Trump’s policies, particularly tariffs. However, the relatively low level of initial filings indicates that employers aren’t widely cutting workers. Continuing claims, a proxy for the number of people receiving benefits, fell to 1.95 million in the previous week, according to Labor Department data released Thursday. That figure has been hovering around the highest since 2021 for the last few months, indicating many out-of-work Americans are finding it difficult to find employment. Investors expect the Federal Reserve to reduce interest rates at their September policy meeting. Recent data point to a cooling labor market, while the impact from tariffs on prices has been limited. Separate data has shown a significant slowdown in job creation over the past three months after sizable downward revisions to May and June figures. The four-week moving average of new applications, a metric that helps smooth out volatility, was little changed at 221,750. Before adjusting for seasonal factors, initial claims rose last week, led by Massachusetts and California.

US retail sales rose in July in a broad-based advance, boosted by car sales and major online promotions in a sign consumers stepped up their spending in recent months. The value of retail purchases, not adjusted for inflation, increased 0.5% after an upwardly revised 0.9% gain in June, Commerce Department data showed Friday. Excluding cars, sales climbed 0.3%. Nine out of 13 categories posted increases, led by the biggest gain in motor vehicle sales since March. Sales at online retailers and general merchandise stores advanced, likely boosted by campaigns including Amazon.com Inc.’s extended Prime Day, Walmart Inc.’s weeklong “Deals” event and a similar promotion at Target Corp. Friday’s report implies a much better start to consumer spending in the second half of the year after uncertainty around President Donald Trump’s policies — chief among them tariffs — took a toll on sentiment and kept many consumers on the sidelines in the preceding months. While the labor market is shifting into a lower gear, additional clarity on trade policy and a rebound in the stock market is giving some consumers more confidence about their spending power.

Federal Reserve officials are closely tracking consumer spending — which supports two-thirds of US economic activity — as they assess the trajectory of monetary policy. Though they have so far held interest rates steady this year until they have a better sense of how tariffs will impact prices, several policymakers seem inclined to resume rate cuts in the coming months to ensure the labor market and the broader economy remain healthy. The retail sales report showed so-called control-group sales — which feed into the government’s calculation of goods spending for gross domestic product — advanced 0.5% in July after an upward revision to the prior month. The measure excludes food services, auto dealers, building materials stores and gasoline stations. Several categories that posted solid gains, such as furniture, sporting goods and cars, also saw some price increases during the month. Because the data aren’t inflation adjusted, an advance could reflect the impact of higher prices.

Interest Rate Insight and the Fed

Stocks rose and short-dated bond yields fell on Tuesday after the roughly in-line CPI inflation reading bolstered speculation the Federal Reserve will be able to cut interest rates in September. The S&P 500 added 0.4%. Treasuries initially climbed across maturities, but pared those moves. The US two-year yield, which is more sensitive to imminent Fed moves, declined two basis points to 3.75%. Traders priced in more than an 80% chance of a quarter-point reduction September after the data was released.

Former St. Louis Fed president James Bullard says he would accept the job of leading the Federal Reserve if the institution’s independence is respected. Bullard confirmed to CNBC that he spoke with Treasury Secretary Scott Bessent on Monday. “We had a brief conversation, and I told him it didn’t sound like they had a process locked down yet, but I told him, I’d be happy to, you know, proceed however they wanted to proceed.” Bullard is one of several candidates in the running to succeed Jerome Powell as Fed Chair.

Impactful International News

Britain’s jobs market appears to be past the worst with a smaller-than-expected drop in payrolls last month, a sign that further clouds the Bank of England’s decision over whether to carry on cutting interest rates. The Office for National Statistics reported an 8,353 decline in employee numbers in July — the smallest fall since January. That will bring some relief for Chancellor of the Exchequer Rachel Reeves, who has presided over a 165,000 tumble in payrolls since October when she used her first budget to hike taxes and deliver another big rise in the minimum wage. Both took effect in April. July’s fall was smaller than the 20,000 decline expected by economists, while the number of job losses in previous months was also revised down on Tuesday. The Bank of England is currently weighing whether to put more weight on a fresh spike in inflation or signs that the economy is deteriorating. Signs of a smaller hit to the labor market will make its decision more difficult.

Company Events

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