August 2025 CPI Preview
25bp cut likely a done deal, while a very soft CPI does not ensure a 50bp cut…
Summary: Stockpiled inventory ahead of major tariffs, which likely delayed some of the tariff effect on consumer goods, has likely been drawn down. Combined with rising import prices of consumer goods (excluding tariffs), there is concern that goods inflation is at risk of rising. However, it appears unlikely that inflation will rapidly accelerate regardless of the tariff impact. Softer demand, evidenced in part by falling services margins in August’s PPI, can limit corporate pricing power and the ability to pass tariff costs onto consumers, and disinflationary pressures in core services and housing can continue to offset some of the rise in core goods. Overall, timing matters and we think it’s still too early to see the full tariff effect in August data. Tariffs will likely feed into more goods and keep prices higher than they would otherwise be in the months ahead, but overall, we do not expect runaway inflation.
Market Implication: After a sharp Treasury rally into and out of last week’s NFP that was greeted by a muted reaction/consolidation in rates to the preliminary benchmark jobs revision earlier this week, it feels like the bond bulls are running out of steam. The softer PPI rekindled some of the attraction for duration via a bull flattener, but even then, market price action doesn’t feel convincing. With terminal Fed Fund expectations meaningfully under neutral, it would require a very soft CPI to move the probabilities by enough to warrant a 50bps cut in September. In general, we think the bar is high for 50bp cuts at this stage. Meanwhile, if CPI comes in higher than expected we do not see rate cut expectations falling much for the September FOMC meeting—a 25bp cut is locked in. If a hotter CPI causes a backup, we would buy the dip.