Instant Insights: CPI rises, but expect the Fed to cut

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September 11, 2025 Fixed income

Consumer prices rose 0.4% in August, taking headline CPI from 2.7% to 2.9% year-over-year. Core prices rose 0.3% month-over-month in August, keeping core CPI at 3.1% year-over-year. While inflation remains stubborn, we do not believe it will be enough to cause the Fed to waiver over cutting rates next week.

Food prices help push inflation higher

Food prices rose 0.5% in August, driven by supply issues in beef and price rises in imported items like coffee. Elsewhere, energy inflation was back in positive territory at 0.7% in August, driven by a 1.9% rise in gasoline prices.

Figure 1: Food and shelter inflation helps push CPI higher¹

Meanwhile core goods prices rose by 0.3% in August, mostly driven by used cars, which rose 1%. Tariff-related goods inflation moderated in August, at 0.2% month-over-month (Figure 2), albeit with notable price rises in relatively small components like televisions (up 2.5%, the fastest since 2021), sewing machines (up 9.1%, the fastest since 2020) and jewelry and watches (up 5.5%, the fastest on record).

Figure 2: Tariff-related goods prices rose again although at a moderate pace²

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“Sticky” core services categories prove stubborn

Disinflation in the slow-moving core services CPI components stalled somewhat in August, although we believe the overall trend remains in place.

Shelter (the largest component of the CPI index) rose 0.4% in August, largely due to a pickup in “lodging away from home” category, but notably continued to moderate on a year-over-year basis, reaching 3.6%, the lowest level since October 2021. Excluding shelter, headline CPI was 2.5%.

Elsewhere, “supercore” services (which exclude food, energy and rental categories) remained at 3.2% year-over-year. Transportation services remained relatively high, driven by a 5.9% increase in airline fares in August (the fastest since 2022) and a 5% rise in motor vehicle repair (the fastest on record).

Figure 3: Supercore services accelerate but the shelter component continues to ease¹

The Fed will likely “look through” above-target inflation

Although inflation remains above-target for now, we believe the Fed will execute a 25bp cut at its next policy meeting, and two further cuts are priced by the end of 2025. Given recent weakness in employment indicators, we expect the Fed will be focused on preventing the labor market from tipping into a contraction and therefore mitigating the threat of a vicious cycle of job losses.

Although continued elevated inflation could complicate the Fed’s hiking cycle looking beyond September, we believe that disinflationary forces remain in play. With rates on a downward trend, we believe it remains a good time for investors to consider locking in yields in fixed income assets.