Inflation, Employment, and Consumer Sentiment Data Offer a Mixed Picture Ahead of Fed Meeting

Matthew Rubin Chief Investment Officer

 

1. CPI inflation rose in August, due to higher energy prices, while core inflation held steady and markets await the Fed’s upcoming rate decision.
2. Weekly jobless claims ticked higher while continuing claims held steady, pointing to a labor market softening yet still on solid ground.
3. Consumer sentiment dropped in early September, with lower- and middle-income households showing the sharpest decline in confidence.

 

1. Inflation Edges Higher While The Fed Weighs Next Steps

The Consumer Price Index increased to a 2.9% annual rate in August, up from 2.7% in July.¹ The gain matched expectations and was fueled in part by higher energy costs. Gasoline prices climbed 1.9% during the month, lifting overall energy 0.7%.¹ These increases pushed headline inflation modestly higher.

Core CPI, which excludes food and energy, remains at 3.1%, in line with forecasts.¹ While new tariffs are expected to exert some pressure through higher import costs, most economists see the effect as temporary. Companies might pass along near-term price increases to consumers, but this is not expected to lead to sustained inflation.

Inflation remains above the Federal Reserve’s 2% target.¹ Looking ahead, attention shifts to the Fed’s policy meeting this week. With the labor market slowing, markets anticipate the central bank will move ahead with a rate cut to provide additional support.

2. Jobless Claims Rise as Labor Market Shows Signs of Cooling

Initial jobless claims rose to 263,000 last week, well above forecasts that predicted a decline to 231,000.² The increase indicates that layoffs are accelerating slightly, though the overall level remains moderate by historical standards. Continuing claims, which measure the number of people still receiving unemployment benefits, remained unchanged at 1.94 million.²

The broader employment picture remains mixed. The unemployment rate is holding at 4.3%, signaling that joblessness is still low relative to long-term averages.² At the same time, job openings declined to 7.2 million, just below the 7.3 million people designated as unemployed.² This narrowing gap points to softer demand for workers compared to the past two years.

Taken together, the data show a labor market easing after a period of strength. While conditions are not yet weak, momentum has slowed. Markets expect that potential interest rate cuts, along with fiscal support, could offer some relief to both employers and workers in the coming months.

3. Consumer Sentiment Slides to Four-Month Low

Last week, the University of Michigan’s Index of Consumer Sentiment fell to 55.4, its lowest level in four months, down from 58.2 in August.³ The decline was sharper than expected, as most analysts had predicted a more modest pullback. Compared with the same time last year, sentiment is down about 21%, underscoring a steady erosion in household confidence.³

The drop was most pronounced among lower- and middle-income consumers, who reported greater strain on their personal finances. Measures of current and expected household finances both fell by roughly 8% in September.³ Consumers also pointed to broader risks facing the economy, including weaker business conditions, concerns about the labor market, and persistent price pressures.

While buying conditions for durable goods improved slightly, other components of the index slipped. Inflation expectations for the next year remained unchanged at 4.8%, but longer-term expectations inched higher to 3.9%, marking the second consecutive monthly increase.³ Despite the decline, sentiment remains above the lows recorded in the spring when tariffs were first announced.

For the period ending 9/12/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ FactSet
² U.S. Bureau of Labor Statistics
³ University of Michigan

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The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
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Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 200^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2025061_26