8/15/25: Inflation Pressure Rises, While Confidence Falls

Financial markets focused on inflation and the consumer this week. The Consumer Price Index (CPI) rose 0.2% month-over-month in July and increased 2.7% year-over-year. Core CPI, excluding food and energy, rose 0.3% month-over-month and jumped 3.1% compared to July 2024, up from a 2.9% year-over-year increase last month. Inflation was driven primarily by vehicles and services, with notable increases in airfares. Underlying data reflected muted goods inflation as businesses absorbed tariff impacts rather than passing higher prices on to consumers.

While the CPI data was in line with consensus expectations, the July Producer Price Index (PPI) data came in far higher than forecasts, pointing to potential future consumer price hikes as higher tariffs are passed through. U.S. wholesale price inflation as measured by the PPI for final demand soared by 0.9% in July, following no change in June and rose 3.3% year-over-year, up dramatically from the 2.4% increase last month. Prices for both goods and services posted sharp increases. July PPI excluding food and energy also jumped 0.9% following no change in June and spiked 3.7% from a year ago after a 2.6% rise in June. Additionally, July Import Prices came in hotter than expected with an increase of 0.4% month-over-month, topping the expected 0.1% increase and last month’s 0.1% decline. After months of trade policy uncertainty, higher tariff rates for many countries began last week, which may keep pressure on inflation going forward. The Federal Reserve will have the benefit of several inflation data points to consider at the September meeting as they strive to balance a cooling labor market with inflationary pressures.

Consumer spending and sentiment also took center stage this week. U.S. Retail Sales increased 0.5% in July after an upwardly revised 0.9% gain in June, in a broad-based advance led by auto sales. However, excluding motor vehicles and gasoline, sales climbed just 0.2%. Control-group sales, which feed into gross domestic product, advanced 0.5% in July after an upward revision to the prior month. The measure excludes food services, auto dealers, building materials stores and gasoline stations. Because Retail Sales data are not inflation adjusted, the advance could reflect the impact of higher prices, which were apparent in several categories.

According to the University of Michigan survey, U.S. consumer sentiment declined from last month and fell short of expectations, with August’s preliminary reading coming in at 58.6 versus 61.7 in July. Both current conditions and expectations deteriorated, as inflation concerns mounted. One year-ahead inflation expectations jumped to 4.9% in August from 4.5% in July, and long-run inflation expectations rebounded to 3.9% in August from 3.4% last month. While the consumer has been resilient, higher debt levels and delinquencies, lower savings, and a weakening labor market could pose challenges to future spending.

After a volatile week, U.S. treasury curve steepened slightly with the 2-year trading at 3.74%, the 5-year at 3.82%, and the 10-year at 4.30% as of this morning. The market is pricing in approximately two 0.25% rate cuts before year end, which remains consistent with our view.

Next week:  New York Fed Services Business Activity, NAHB Housing Market Index, Housing Starts, Building Permits, MBA Mortgage Applications, Atlanta Fed Business Inflation Expectations, FOMC Meeting Minutes, Jobless Claims, Philadelphia Fed Business Outlook, S&P Global US PMI Composite, Existing Home Sales, Leading Index.

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