August CPI to Test Fed’s Balancing Act Between Inflation Risks and Labor Market Weakness — Evening Brief – 09.09.25  

Economists anticipate a mixed picture in Thursday’s August consumer price index (CPI) release, with consensus calling for headline inflation to accelerate to 2.9% year-over-year, up from July’s 2.8%. If realized, it would mark the fastest pace since January and push inflation further above the Federal Reserve’s 2% target. 

At the same time, core CPI, which excludes food and energy, is forecast to remain steady at 3.1%, offering some reassurance that underlying price growth isn’t accelerating. Still, at more than a percentage point above target, this stability does little to bolster claims that current monetary policy has fully subdued inflation. 

The latest report comes as tariffs increasingly threaten to pass through to consumer prices, raising concerns that disinflation progress may be stalling. Over the past three months, alternative inflation gauges—such as the Atlanta Fed’s sticky-price CPI, which tracks items that change price infrequently—have shown a gradual reflationary trend. The average of several one-year inflation measures has risen for three consecutive months through July, and a fourth monthly increase would raise alarms that underlying inflation pressure is re-emerging. 

For policymakers, the CPI update arrives at a delicate moment. While inflation risks appear to be edging higher, the labor market slowdown is commanding greater attention. Payroll growth has nearly stalled, the unemployment rate has risen, and benchmark revisions from the Bureau of Labor Statistics have painted a weaker picture of hiring than previously thought. 

The bond market is signaling that investors expect the Fed to prioritize employment concerns. On Monday, the 2-year Treasury yield, which is highly sensitive to Fed policy expectations, fell to 3.49%, the lowest in three years and well below the current 4.33% median Fed funds target rate. The move reflects growing conviction that the Fed may have to cut rates more aggressively—even if inflation remains above target. 

The August CPI data will therefore be pivotal: confirmation of stronger inflation pressures could limit the Fed’s ability to ease policy, while a softer print would give the central bank more room to prioritize growth and employment.