Inflation Data Reinforces September Rate Cut Outlook

CPI Confirmations

Inflation data released for July showed a modest rise, aligning with market expectations and reinforcing the case for a Federal Reserve rate cut next month. The Consumer Price Index (CPI) rose 0.2% for the month and 2.7% year-over-year. Core CPI, which excludes food and energy and is the Fed’s preferred measure for tracking underlying inflation, increased 0.3% for the month and 3.1% annually, slightly above forecasts. Meanwhile, the Personal Consumption Expenditures (PCE) Price Index, another key inflation gauge, rose 2.6% year-over-year in June, with core PCE climbing 0.3% month-over-month and 2.8% annually in July.

Producer price data echoed this trend. The Producer Price Index (PPI) was flat in June, and up 2.3% over the past year. PPI tracks prices at the manufacturer level within the U.S., while CPI and PCE reflect the prices consumers pay across all goods and services. These measures indicate that inflationary pressures, while persistent, remain moderate despite concerns over tariffs.

While inflation remains sticky, it has made progress from the 9.1% level seen in 2022.  And while we all want to see closer to the 2% Fed target, the economy is also growing above trend.  We’d much prefer a little higher inflation with above trend growth any day. 

Tariffs have had some impact, but not to the extent many anticipated, something we’ve been saying for awhile. The July CPI release, combined with a sharply revised jobs report showing slower employment growth than initially reported, gives the Fed the cover to begin to cut rates. Markets have gone from a 38% chance of a September rate cut to 96%. And there is even talk that the Fed should cut by 50 basis points (bps). We’re not in that camp, but agree that the Fed should begin the cutting cycle as policy is just too restrictive.

Chart 1: U.S. Consumer Price Index^[1]

Are Tariff Fears Overestimated?

Concerns that tariffs could reignite inflation appear increasingly overstated, especially in light of recent productivity trends that are helping to offset cost pressures. In the second quarter of 2025, nonfarm business sector labor productivity rose by 2.4%, driven by a 3.7% increase in output and a 1.3% gain in hours worked. This marks a sharp rebound from the 1.8% decline in the first quarter.

These gains, fueled in part by AI-driven efficiencies, are enabling firms to expand output without proportionally increasing labor costs. While unit labor costs still rose 1.6% in Q2 and 2.6% year-over-year, the broader inflationary impact of tariffs has remained modest. Tariffs may lift prices in specific categories, but their effect on overall CPI has been far smaller than anticipated, often offset by productivity-driven cost savings and price declines elsewhere. Taken together, these dynamics suggest that rising productivity is acting as a buffer, helping to absorb cost shocks and keep broader inflation in check.

Looking ahead, all eyes will be on Fed Chair Jerome Powell at the Jackson Hole Economic Symposium later this month, where markets expect clarity on the Fed’s policy path. With inflation showing modest but persistent strength across CPI, PPI, and PCE, and labor market data softening, Powell’s tone could be pivotal. The symposium falls in a long gap between FOMC meetings, making it a key moment for the Fed to signal its stance before September’s decision. If Powell frames recent inflation as transitory and acknowledges labor market slack, the case for a rate cut remains strong. However, any hint of concern over persistent price pressures could shift market expectations.

August and September are seasonally the weakest of the year.  We wouldn’t be surprised to see more volatility going ahead, but on weakness, given the economy and earnings that remain strong is historically a positive for risk assets (equities) into the seasonally strongest period of the year, which is the fourth quarter. 

Chart 2: Target Rate Probabilities for Sept Fed Meeting^[2]

Stephanie Link’s TV Schedule:

Sources:

^[1] Source: CNBC, As of August, 2025D.

^[2] CME Group, As of August 2025.

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.