Weekly Update 09/12/2025: US Inflation Comes in as Expected Setting the Stage for the Fed to Cut Rates Next Week

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Domestic Economic News  

US job growth was far less robust in the year through March than previously reported, adding to mounting pressure on the Federal Reserve to lower interest rates. The number of workers on payrolls will likely be revised down by 911,000 for the 12 months through March — or nearly 76,000 less each month on average — according to the government’s preliminary benchmark revision out Tuesday. The final figures are due early next year. Before the report, the government’s payrolls data indicated employers added nearly 1.8 million total jobs in the year through March on a non-seasonally adjusted basis, or an average of 149,000 per month. The Bureau of Labor Statistics adjustment indicates the labor market slowdown in recent months followed an extended period of more moderate job growth that may lay the groundwork for a series of interest-rate cuts beginning next week. Fed Chair Jerome Powell recently acknowledged risks to the job market have increased, and two of his colleagues preferred to lower borrowing costs in July. Traders widely expect central bankers to cut rates at the conclusion of their two-day meeting Sept. 17. While benchmark revisions are carried out every year, they’ve garnered added attention this year with investors and Fed watchers looking for any signs that the labor market may be slowing faster than previously thought.  

Sentiment among US small businesses edged higher in August, led by the most favorable sales expectations in six months as owners grew more sanguine about the health of their companies. The National Federation of Independent Business optimism index advanced 0.5 point to 100.8, the highest level since January, according to data out Tuesday. Four of the 10 components that make up the gauge improved and two were unchanged. A net 12% of owners expect higher retail sales volumes in the next three months, up 6 points and contributing the most to the increase in the overall optimism index, NFIB said. When asked to rate the overall health of their business, 68% of owners said it as either excellent or good, up from last month, while 31% said it was either fair or poor, down from July. While the NFIB said higher import duties may be starting to impact pricing, the net share of small businesses that raised prices dropped to 21%, the lowest reading of the year. Fewer firms also said they expect to boost prices in the next three months. A net 34% of owners expect better business conditions, down 2 percentage points from a month earlier but still elevated. A net 14% said now is a good time to expand their business, also down 2 points from July when it was the largest share since January. The group’s uncertainty index fell by 4 points to 93 last month, but that was still the 11th highest reading in more than 51 years, according to NFIB. The decline was due to a decrease in uncertainty about financing expectations and planned capital expenditures, according to NFIB. Despite President Donald Trump signing into law on July 4 his “One Big Beautiful Bill” that includes business tax provisions to encourage investment, only 21% of owners plan capital outlays in the next six months, down 1 point from July. Meanwhile, labor quality ranked as the top concern for 21% of respondents, unchanged from the prior month. Even so, the share reporting unfilled job openings fell to 32%, the lowest since December 2020.

Applications for US unemployment benefits jumped last week to the highest level in almost four years, indicating layoff activity may be on the rise amid a sharp slowdown in hiring. Initial claims rose by 27,000 to 263,000 in the week ended Sept. 6, the highest since October 2021, according to Labor Department data released Thursday. The median forecast in a Bloomberg survey of economists called for 235,000 applications. Thursday’s figures follow a monthly report on employment, published on Sept. 5, which showed the US added just 22,000 jobs in August, extending the sharp slowdown in job growth seen in recent months. Uncertainty surrounding President Donald Trump’s economic policies has made employers more hesitant to hire in 2025. Weekly filings can be volatile around holidays, and this week’s figures included the Labor Day weekend. The four-week moving average of new jobless claims, a metric that helps smooth out volatility, rose to 240,500, the highest since June. The numbers were also boosted by an outsize increase in Texas, which reported a 15,304 surge in claims before adjusting for seasonal factors. Michigan saw the second-largest increase, of 2,980, while a majority of states registered declines. Meanwhile continuing claims, a proxy for the number of people receiving benefits, were unchanged at 1.94 million in the week ended Aug. 30. Thursday’s figures mark the final read on the state of the US labor market ahead of the Federal Reserve’s Sept. 16-17 policy meeting. The central bank is widely expected to resume interest-rate cuts amid building concerns about employment, after keeping rates on hold so far this year to guard against inflation risk.

Interest Rate Insight and the Fed

US wholesale inflation unexpectedly declined in August for the first time in four months, adding to the case for the Federal Reserve to cut interest rates. The producer price index decreased 0.1% from a month earlier and July’s figure was revised down, according to a Bureau of Labor Statistics report out Wednesday. From the year before, the PPI rose 2.6%. The report suggests companies refrained from outsize price increases last month despite higher costs from President Donald Trump’s tariffs. While the step back follows a sizable advance in July, many firms have been wary that steep markups could push customers away at a time when economic uncertainty continues to weigh on spending decisions. US stock futures and Treasuries rallied after the release. Goods prices excluding food and energy rose 0.3%. Services costs fell 0.2%. Within services, margins at wholesalers and retailers fell 1.7%, matching the biggest drop in data going back to 2009 and reversing an outsize increase in July. Margins have been volatile from month to month so far this year, underscoring uncertainty around the impact of trade policy on prices and demand. “It does look like retailers have been eating tariff costs in recent months,” Stephen Stanley, chief economist at Santander US Capital Markets LLC, said in a note. “Firms have consistently said that they have held the line as long as they could, but that they would need to begin selectively hiking prices going forward.” The extent to which companies pass the burden from tariffs on to consumers will be key in shaping the path for interest rates this year. While Fed officials generally expect import levies to push inflation higher through the remainder of 2025, they’re undecided over whether it will be a one-time adjustment or a more enduring effect.

Three-quarters of the decline in services prices in August could be attributed to a 3.9% drop in margins for machinery and vehicle wholesaling, according to the BLS. Finished consumer goods excluding food and energy, meanwhile, rose at the fastest pace in February. That was boosted in part by a jump in prices for tobacco products, which the BLS said was a “major factor” driving goods prices higher. Policymakers are largely expected to cut rates when they meet next week in an effort to counter a rapid slowdown in the labor market. Fed Chair Jerome Powell cautiously opened the door to a cut at the Fed’s Jackson Hole symposium last month, and more recent data showed the hiring slowdown extended into August. Economists also 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. Those measures were mixed in August: Portfolio management services and airfares continued to rise at a solid pace, while various measures of health care services were more tame.

Underlying US inflation rose as expected in August, keeping the Federal Reserve on track to cut interest rates next week. The core consumer price index, excluding the often volatile food and energy categories, increased 0.3% from July, according to Bureau of Labor Statistics data out Thursday. When incorporating those components, the overall CPI rose 0.4%, the most since the start of the year. Goods prices, excluding food and energy, accelerated 0.3%, matching the biggest climb since May 2023. That reflected increases in new and used cars, apparel and appliances, which some economists pointed out as possible impacts of tariffs. But analysts were generally divided as to how much of a role the duties played in the report, with others more focused on surges in travel-related services like airfares and hotel stays. Several household expenses also picked up, including groceries, gasoline, electricity and car repairs. Taken together, the report suggests inflation continues to linger. President Donald Trump’s global tariffs are impacting prices of some goods, while ongoing increases in services costs may present a more persistent pressure to overall inflation. Even so, Fed officials are widely expected to cut interest rates for the first time this year at their meeting next week after a series of weak employment data. But firm inflation, if sustained, may complicate the path for additional reductions at subsequent meetings. “I don’t see anything in this report that’ll stop the Fed from at least initially restarting the process of easing,” said Scott Anderson, chief US economist at BMO Capital Markets. “But I don’t think this inflation story’s over.” One of the key drivers of inflation in recent years has been housing costs — the largest category within services. Shelter prices picked up 0.4%, the most since the start of the year and reflecting advances in both rents and the largest jump in hotel stays since November. Another services gauge closely tracked by the Fed, which strips out housing and energy costs, stepped down somewhat, helped by declines in medical care, recreation and car rentals. 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. The PCE draws from the CPI as well as another release on producer prices, which showed categories that feed into the PCE were mixed as noted.

Impactful International News

French industrial production declined in July in a poor start to the quarter that descended into political chaos this week with the fall of Francois Bayrou’s government. Factory output in the euro area’s second-largest economy decreased 1.1% from June as the manufacturing sector dropped 1.7%. Still, economists surveyed by Bloomberg had forecast declines of 1.4% and 1.2% respectively. French businesses have faced prolonged uncertainty over tax and government spending since elections last year delivered a hung parliament that has struggled to agree on financial legislation. The political upheaval worsened again on Monday with the collapse of the government in a confidence vote over reducing the public debt burden. Still, there have been signs of green shoots in recent months with the manufacturing sector ending a 2 1/2-year slump in August, according to S&P Global’s Manufacturing Purchasing Managers’ Index. June’s industrial production figures also surged unexpectedly, notching up a 3.7% gain, and economic growth outperformed expectations in the second quarter. Tuesday’s data showed sharp declines in the transport materials sector in July, while construction rebounded.  

As noted, Francois Bayrou resigned as France’s prime minister Tuesday, putting the onus on President Emmanuel Macron to quickly name a new premier who can stabilize the country’s urgent fiscal situation. Macron said he would tap a new prime minister in the coming days. Bayrou submitted his resignation and will remain as a caretaker until a successor is named, according to Macron’s office. Whoever takes on the role will need to assemble a government and then find a way to pass a budget in a fragmented National Assembly, an exercise that’s toppled the last two prime ministers. Meanwhile public pressure is growing with nationwide protests planned. While Macron doesn’t lack for people who might accept the role, selecting someone who can find common ground among the groups is far from obvious. “Which party can one even recruit from?” Kathryn Kleppinger, George Washington University professor of French studies said in an interview on Bloomberg Television. “I fear we’re going to be dealing with more of the same.”  

The European Central Bank kept borrowing costs unchanged for a second meeting, deeming inflationary pressure contained and economic dangers abating. Investors concluded that there’ll be no more cuts. The deposit rate was left at 2% on Thursday – as predicted by all analysts in a Bloomberg survey. Policymakers offered no guidance on future steps, continuing to stress that they’ll act one meeting at a time based on incoming data. “Inflation is where we want it to be,” President Christine Lagarde told reporters in Frankfurt, while stressing that the outlook for prices remains “more uncertain than usual” due to the volatile trade environment. “Risks to economic growth have become more balanced,” she said. “While recent trade agreements have reduced uncertainty, a renewed worsening of trade relations could further dampen exports and drag down investment and consumption.” Traders reacted to Lagarde’s remarks by curbing wagers on further reductions in interest rates. Market pricing now implies no further decreases this cycle. That pushed European bond yields higher, with the German 10-year up three basis points to 2.69%. The euro rose to $1.174, also supported by a weaker dollar. Most officials reckon rates are appropriate to cope with the fallout from Donald Trump’s trade levies, geopolitical tensions and — more recently — renewed political turbulence in France that’s rattled markets. Economic expansion in the 20- nation euro area has held up, while inflation — at a shade over the 2% goal — is under control. Updated quarterly projections showed consumer prices will rise 1.7% next year — closer to target than the previous 1.6% forecast. But in 2027, they’ll increase by 1.9%, less than envisaged earlier. Gross domestic product is seen advancing 1.2% this year and 1% in 2026. “We have indicated very clearly in our strategy that minimal deviation will not necessarily, if they remain minimal and not long lasting, will not necessarily justify any particular movement,” Lagarde said of the fresh inflation outlook. She once again described the ECB as being “in a good place,” declaring the process of disinflation as over. The ECB lowered rates eight times in the space of a year before standing pat in July. That brought them down from a peak of 4% to a level that’s seen as neither restricting nor supporting the economy. The likely plateau for the ECB coincides with preparations by the Federal Reserve to trim borrowing costs next week for the first time since December. Inflation in the euro area isn’t expected to stray too far from 2% over the medium term, with most officials confident that price stability has been restored after the spike that followed Russia’s invasion of Ukraine. Some, like Lithuanian central-bank Governor Gediminas Simkus, fret more about a prolonged undershoot, however, listing a firmer euro among other factors. Others including hawkish Executive Board member Isabel Schnabel see inflation risks as tilted to the upside. They cite trade friction and a jump in European defense spending. At the same time, the economy is proving resilient. Despite the European Union’s trade deal with the US irking industry by fixing tariffs of 15% on most exports, confidence has improved and a years-long manufacturing slump is nearing its end. Some analysts, however, insist the full effect of Trump’s trade measures will only be felt later this year.

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