US August inflation spikes to 2.9%; as tariffs start to pinch hard

16 Sep 2025 , 03:29 PM

AUGUST US CONSUMER INFLATION UP 20 BPS AT 2.9%

Between April and June 2025, the US headline inflation surged from 2.3% to 2.7%. With the tariff impact getting more intense, inflation further spiked to 2.9% in August 2025. inflation in the US is now at the highest level since January 2025 and is a full 90 bps above the Fed target of 2%. The tariff impact is yet to fully show up, and if the US goes ahead and levies steeper tariffs on India, China, and Brazil; the US inflation could go above 3%. In August 2025, the actual inflation trigger was not core-inflation; but food and energy inflation.

FOOD AND ENERGY INFLATION SURGE; CORE INFLATION FLAT

The month of August saw hardening of food inflation as the huge tariffs made food costlier.

Inflation Basket Category	Aug 2025 (YOY)	Jul 2025 (YOY)	Inflation Basket Category	Aug 2025 (YOY)	Jul 2025 (YOY)
Food Inflation	3.20%	2.90%	Core Inflation	3.10%	3.10%
Food at home	2.70%	2.20%	Commodities less food and energy	1.50%	1.20%
·          Cereals and bakery products	1.10%	1.00%	·          Apparel	0.20%	-0.20%
·          Meats, poultry, fish, and eggs	5.60%	5.20%	·          New vehicles	0.70%	0.40%
·          Dairy and related products	1.30%	1.50%	·          Used cars and trucks	6.00%	4.80%
·          Fruits and vegetables	1.90%	0.20%	·          Medical care commodities	0.00%	0.10%
·          Non-alcoholic beverages	4.60%	3.60%	·          Alcoholic beverages	1.90%	1.40%
·          Other food at home	1.50%	1.20%	·          Tobacco and smoking products	6.30%	6.50%
Food away from home	3.90%	3.90%	Services less energy services	3.60%	3.60%
·          Full service meals and snacks	4.60%	4.40%	Shelter	3.50%	3.70%
·          Limited service meals	3.20%	3.30%	·          Rent of primary residence	3.50%	3.50%
Energy Inflation	0.20%	-1.60%	·          Owners’ equivalent rent	4.00%	4.10%
Energy commodities	-6.20%	-9.00%	Medical Care Services	4.20%	4.30%
·          Fuel oil	-0.50%	-2.90%	·          Physician Services	3.50%	3.10%
·          Gasoline (all types)	-6.60%	-9.50%	·          Hospital Services	5.80%	5.80%
Energy services	7.70%	7.20%	Transport Services	3.50%	3.50%
·          Electricity	6.20%	5.50%	·          Motor vehicle Maintenance	8.50%	6.50%
·          Natural gas (piped)	13.80%	13.80%	·          Motor vehicle insurance	4.70%	5.30%
Headline Consumer Inflation	2.90%	2.70%	·          Airline Fare	3.30%	0.70%

Data Source: US Bureau of Labor Statistics

CPI inflation sets the tone for PCE inflation; which influences Fed rate decisions.

• August food inflation was up 30 bps at 3.2%. Upward pressure came from meat, poultry, fish, vegetables, fruits and beverages; offset by fall in dairy and limited-service meals.
• Energy inflation in August 2025 hardened by 180 bps to 0.20%. Upward pressure came from energy commodities and services; except for piped natural gas, which was flat.
• August Core inflation flat at 3.1%. Downward pressure from tobacco, motor insurance, medical care; offset by spike in new vehicles, used cars, motor maintenance, airfares.

The food inflation reflects the impact of tariffs while energy inflation shows the impact of trade constraints in global oil movement.

AUGUST 2025 MOM INFLATION SPIKES TO 0.4%

Here is the high frequency month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Mar 2025	0.4%	(2.4)%	0.1%	(0.1)%
Apr 2025	(0.1)%	0.7%	0.2%	0.2%
May 2025	0.3%	-1.0%	0.1%	0.1%
Jun 2025	0.3%	0.9%	0.2%	0.3%
Jul 2025	0.0%	-1.1%	0.3%	0.2%
Aug 2025	0.5%	0.7%	0.3%	0.4%

Data Source: US BLS (negative figures in brackets)

High frequency inflationary trend is almost similar to the trend we see on yoy inflation. The MOM core inflation has been flat; but we have seen a sharp bounce in the inflation reading for food and energy products and services.

CME FEDWATCH – SEPTEMBER RATE CUT, ALMOST FAIT ACCOMPLI

The July Fed meet saw status quo on rates at 4.25%-4.50%; but at Jackson Hole, Powell hinted at a 25-bps rate cut in September. The dissent vote from Chris Waller and Michelle Bowman; with the market demands have put pressure on Powell. Here is how the CME Fedwatch probabilities (based on implied Fed Futures trades) look.

Fed Meet	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	3.6%	96.4%	Nil
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	3.0%	81.0%	16.0%	Nil
Dec-25	Nil	Nil	Nil	Nil	Nil	2.8%	76.3%	19.9%	0.9%	Nil
Jun-26	Nil	0.1%	4.1%	19.5%	34.9%	28.8%	10.9%	1.6%	0.1%	Nil
Dec-26	1.0%	5.2%	15.8%	27.5%	28.1%	16.5%	5.1%	0.7%	Nil	Nil

Data source: CME Fedwatch

After the Jackson Hole speech by Powell, the market is treating a 25-bps rate cut in September as done and dusted.

• The CME Fedwatch is betting on a 25-bps rate cut in September, and total of 75 bps by December 2025. That is a lot of front-loading of rate cuts.
• By Dec-25, probability of 75 bps rate cut remains very high at 79.1%. The base case looks like a certain 50-bps rate cut by December and a strong possibility of 75-bps.
• CME Fedwatch has assigned a high 77.6% probability for 2 more rate cuts in 2026, taking rates to 3.00%-3.25% range. That would be a lot of dovishness by end of 2026.

Overall, we may be staring at 3 rate cuts in 2025 and 2 more rate cuts in 2026. Of course, a lot will depend on what Powell does, and what the next Fed chief does!