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August CPI report: Not enough to change the Fed’s course

Market response

September 11, 2025 | 2 min read

Magdalena Ocampo

Market Strategist

August consumer prices came in slightly higher than expected, bringing the annual headline increase to 2.9%, 0.2ppt higher than last month’s reading and the highest in seven months. Core inflation, which excludes food and energy prices, rose 3.1%, flat from last month’s reading. Tariff price increases are showing up in consumer prices, but the impact remains contained thus far. Notably, the jump in initial jobless claims today shifted focus away from inflation, reinforcing the narrative that the Fed is about to start a sequence of rate cuts.

Report details

Tariff-related price increases made their way through consumer prices in August. Headline inflation was slightly higher than expected, rising 0.4% for the month and 2.9% for the year, both measures up 0.2 ppt from last month. Core inflation, which strips out food and energy, came in as expected, increasing 0.3% in August, with the annual rate rising 3.1%, unchanged from last month. While tariff-related price pressures still appear to be broadly contained, their rolling impact will likely continue to show up in consumer prices in the months ahead.
Food prices rebounded meaningfully in August after last month’s soft reading. Fresh fruits and vegetables, a segment highly exposed to tariff pressures, saw its highest monthly increase since March 2022. After last month’s decline, energy prices increased by 0.7% in August, as the cost of gasoline rose. While geopolitical events have had some influence this year, energy prices have largely been rangebound as supply-demand dynamics overshadow shorter-term fluctuations.
Core inflation, mainly driven by services prices, rose a modest 0.3% in August. Shelter was the largest contributor to overall inflation, with owners’ equivalent rent picking up from last month, albeit still in a downward trend.
Tariff-related price increases also made their way through core inflation categories largely sourced abroad. Its overall impact, however, was somewhat contained as the monthly increase was flat from July. Inflation in used and new auto prices experienced a more substantial increase from last month. After two months of consecutive increases, consumers are starting to bear the brunt of tariffs on vehicles.
The Fed's preferred supercore inflation measure increased by 0.3% from last month’s 0.5% gain, keeping the annual rate flat at 3.2% from last month. The supercore inflation measure, which excludes shelter from core services and is primarily driven by wage costs, could see further upward pressure ahead if wages rise courtesy of labor supply shortages. The weakness in labor demand of late, however, has likely kept wage costs subdued.
While the CPI report was expected to be the focus of today, the surge in initial jobless claims (up 263k—the highest level in almost four years albeit still at low levels compared to 2021) largely overshadowed the rise in consumer prices. Investors should be weary of interpreting the jump in jobless claims today as a recessionary signal, especially as the surge was concentrated in Texas, where the state extended support to those who are still unable to work due to the summer flooding. Nevertheless, the jump in claims potentially heightens the urgency for rate cuts amongst FOMC members, even with broader economic activity still showing signs of resilience.

Policy outlook

Today's CPI report came out slightly hotter than expected, a sign that tariff-related price pressures are still making their way through consumer prices. Given that the pass-through effect of tariffs was more pronounced in goods categories most vulnerable to tariffs, it is likely that the Fed will continue to track inflation developments closely. However, the increase in consumer prices was not large enough to shift the Fed’s focus away from recent labor market demand weakness and effectively seals the rate cut next week. We expect a sequence of Fed cuts, but note that the policy course throughout the rest of the year may become more complicated over the coming months if inflationary pressures grow alongside a cooling labor market.

Macro views

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