Fresh inflation data released Friday, August 29, 2025, showed that prices ticked higher in July but remained in line with forecasts, reinforcing expectations that the Federal Reserve will move forward with an interest rate cut in September.
The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, showed that core prices—excluding food and energy—rose 2.9% year-over-year, the highest since February and up from 2.8% in June. On a monthly basis, core PCE climbed 0.3%. The headline index increased 2.6% annually and 0.2% month-over-month.
While inflation is still running above the Fed’s 2% target, the pace was anticipated by markets, easing fears of a policy shift. Energy costs declined 2.7% from a year earlier, while food prices rose just 1.9%. Services remained the main driver of inflation, advancing 3.6% compared with a modest 0.5% increase in goods.
Despite higher prices, consumer activity remained resilient. Personal spending grew 0.5% in July, matching forecasts, while personal income rose 0.4%. The strength in household demand suggests that U.S. consumers continue to support the economy even as tariffs and price pressures persist.
The figures indicate that recent tariff measures imposed by President Donald Trump, including a 10% baseline levy on imports and reciprocal duties on key trading partners, are filtering through the economy but not yet significantly curbing demand.
While inflation remains slightly elevated, policymakers have shifted their focus to the labor market. Payroll data for July revealed slower job creation and downward revisions to previous months, raising concerns that employment growth may be softening more sharply than anticipated. Fed Chair Jerome Powell noted last week that both labor supply and demand are cooling, increasing the risk of higher unemployment.
Fed Governor Christopher Waller reiterated his support for a 25-basis-point cut in September, noting that downside labor risks outweigh modest inflation pressures. He added that he would consider a larger move if August employment data, due September 5, shows further weakening.
Markets continue to price in a strong likelihood of a September 17 rate cut, with traders expecting a quarter-point reduction. Analysts suggest that unless upcoming inflation releases—such as the Producer Price Index (PPI) and Consumer Price Index (CPI) in mid-September—surprise sharply to the upside, policymakers will move ahead with easing.
Equities remained under pressure following the release, with the S&P 500 down around 0.7% in midday trading. Treasury yields held firm, reflecting expectations for lower borrowing costs in the months ahead.
For investors, the Fed’s path suggests a supportive environment for equities, particularly small- and mid-cap firms that benefit most from lower financing costs. Fixed income markets may also find support as yields adjust lower. Meanwhile, commodities such as gold are likely to retain a bid, with lower rates reducing the opportunity cost of holding non-yielding assets.
The bottom line: while inflation remains above target, the Fed appears set to prioritize employment risks, keeping September’s policy meeting squarely on track for a rate cut.