Hotter inflation data likely temper the Fed’s upcoming policy response in September

Trend watch

There has been a sizable jump in the Kastle Back to Work Barometer since Labor Day, pushing up to 55.8 for the latest week. While that’s a new post-COVID high, it was high 90s prior to 2020. 

Meanwhile, the big month-to-month swings in freight have continued based on August data from early reports by two of the nation’s largest ports. Container volumes at Long Beach fell 4.5% in August, while Charleston jumped 8.0%; they are up 8.3% and 5.4%, respectively, on a year-to-date basis compared to the same period in 2024. They are the second and sixth largest U.S. container ports, respectively.

Additionally, we anticipate that small package volumes will decline sharply in September due to the end of the so-called de minimis exemption, whereby packages containing value under $800 don’t have to pay import duties or tariffs, on August 29^th. That’s about 4 million packages per day, or roughly 90% of all U.S. cargo entries. In the near term, U.S. Customs will need to devise an efficient system for handling the paperwork and collecting duties for more than 1.4 billion packages. 

Our take

Last week we discussed the decidedly weak trend in job growth; however, there appears to be more nuance in the details. For instance, the underlying segment-level losses in August were more muted, and the unemployment rate is at 4.3%, just a tick higher than a year ago. Also, the recent 27,000 bump in jobless claims was largely localized due to floods in central Texas.

The softer jobs data wasn’t surprising given that business decisionmakers have been in the “no hire/no fire” mode as they deal with the uncertainty around tariffs and their effect on the overall economy, complicating personnel decisions. To wit, many businesses seemed to view the tariff uncertainty as a temporary phenomenon, albeit a very big one.

We’re optimistic that the recent rebound in job growth—about 50,000 monthly in July and August—will endure, bolstered by the passage of the One Big Beautiful Bill Act (OBBBA) and improved tariff clarity with key trade partners, including the European Union, South Korea and Japan, and an extension for China.

Unfortunately, weaker labor data was coupled with more signs that inflation is running hotter in August – up from 2.7% annually to 2.9% – as the effect of tariffs creep into prices. Food and energy ticked up in August. While most of the evidence of tariffs appears in manufactured goods such as motor vehicle parts and equipment, tires, and home furnishings, it’s starting to show up in food prices, including tomatoes.

Furthermore, inflation within consumer services are running hotter than overall inflation. Yet, there are positive signs looking forward as wholesale prices ebbed in August, with the Producer Price Index. Additionally, productivity reaccelerated after two softer quarters, while unit labor costs rose 1% during the second quarter, down sharply from 6.9% in the fourth quarter.

The Federal Reserve (Fed) continues to face a challenging environment. Across the board, Fed officials—both dovish and hawkish—have acknowledged that monetary policy remains restrictive. In light of the ongoing deterioration in labor market conditions, we anticipate a quarter-point (0.25%) rate cut on September 17^th.

Looking beyond September, the Fed’s policy response is tougher to handicap, particularly considering the many tariff-related distortions in economic data. While the softening jobs trend has sparked speculation about deeper or more frequent rate cuts this year, we maintain our view that the Fed is likely to proceed cautiously. Policymakers will want to ensure that the recent weakness is temporary and inflationary pressures aren’t mounting.  

Bottom line

The U.S. economy remains in a muddle-through environment. We’re hopeful that the modest reacceleration in job growth during the past two months will persist, supported by certainty in tax policy and further clarity on the tariffs. We expect the Fed to proceed cautiously until there’s more evidence, which we see as a quarter-point rate cut at the September 17th meeting.