U.S. CPI : Headline rises, Core steady, Fed pivot nears

What happened

Today, the latest CPI release from the Bureau of Labor Statistics showed a +0.4% MoM increase in headline CPI. Assessing the monthly figures, shelter costs increased by +0.4%, higher than the +0.2% increase in July. Prices also increased in airline fares (+5.9%), used cars and trucks (+1.0%) and apparel (+0.5%) while the index for medical care (-0.2%), recreation (-0.1%) and communication (-0.1%) registered a decrease over the month. Core CPI rose by +0.3% in August, matching July’s increase and aligning with market expectations. Shelter costs, which climbed +0.4% month-over-month, remained the largest contributor to core CPI and were the primary driver behind the overall monthly increase across all items. When assessing the Fed’s closely watched ‘supercore’ inflation rate, which excludes shelter from the overall Core services figure, the latest reading reported an increase of +0.3%, down from +0.4% the month prior, pointing to slightly declining price pressures in the service sector amidst emerging broader macroeconomic headwinds.

Moreover, prices for food increased by +0.5% in August (after remaining unchanged the month prior) with the ‘Food-at-Home’ index increasing by +0.6% over the month. ‘Food-away-from-Home’ (i.e., restaurants) index increased by +0.3% over the month, with the corresponding YoY figure at +3.9%. Broader energy prices increased by +0.7% in August after decreasing by -1.1%  in July. Overall, the index for used cars and trucks (+6.0%), motor vehicle insurance (+4.7%) registered the largest increases over the past 12 months.

What does it mean for investors?

August’s CPI report paints a mixed picture: headline inflation rose to +2.9% YoY in August, up from +2.7% in July, aligning with market expectations. Core CPI - which excludes volatile food and energy - remained steady at 3.1% YoY, suggesting some stabilization in underlying price pressures. On a monthly basis, core CPI was flat, indicating a pause in momentum. While fuel prices declined significantly on a YoY basis, electricity prices surged, and travel-related categories like airline fares and hotel rates also saw notable increases. Food inflation remained sticky, with sharp increases in items like coffee, beef, and eggs.

Tariff-sensitive categories such as apparel and furniture also experienced upward pressures, reflecting the impact of elevated import duties. Despite the inflation uptick, markets reacted mildly, having largely priced in the effects of tariffs. Instead, attention shifted to labor market data, where initial jobless claims jumped by 27,000 to 263,000 - well above the expected 235,000.

This unexpected weakness in employment led markets to price in nearly 75bps of Fed rate cuts by year-end. With inflation appearing contained and labor market cracks emerging, the Fed is bound to  pivot from its cautious stance and begin easing in September.

The Federal Reserve will closely monitor the upcoming release of Core PCE - its preferred inflation gauge - which stood at 2.9% YoY in July, still meaningfully above the Fed’s 2% target. The next PCE data point, due on September 26, will be a key input into the Fed’s decision-making process for the remainder of 2025. While headline CPI came in line with expectations, concerns around tariff-induced inflation remain elevated, especially as new trade measures could pressure input costs across various sectors. Markets responded positively to the CPI print: at the time of writing, the S&P 500 and NASDAQ were up +1.03% and +1.24%, respectively, while the 2-Year Treasury yield fell to 3.50% and the 10-Year to 4.00%.

Despite lingering inflation risks, the Fed now has a robust set of indicators to assess - labor market softness, rising unemployment, and downward revisions to job growth - alongside moderating inflation. This combination strengthens the case for a rate cut at the upcoming FOMC meeting. Our base case remains that the Fed will deliver its first rate cut of the year in September.