The 25bp cut for September is already effective, and today’s CPI data will not alter this decision. Markets are already anticipating an additional 25bp cut, with expectations extending beyond September.
1. Positive Aspects
1A. Shelter – Mortgage Rates Drop
Mortgage rates fell sharply in August, easing financial conditions for households:
| June | July | August | |
|---|---|---|---|
| 30Y Jumbo Mortgage | 6.93% | 6.88% | 6.70% |
| 30Y Mortgage | 6.79% | 6.73% | 6.58% |
| 30Y Bond YTM | 4.845% | 4.886% | 4.917% |
| Mortgage vs. 30Y Bond Spread | +1.945% | +1.844% | +1.663% |
By early September, mortgages declined further, with jumbo rates down -1.955% and standard 30Y down -2.862% compared to end-August.
1B. FRED Deflator Stability
The Fed’s preferred deflator (real YTM 10Y Notes) held steady at 2.38% in August, unchanged from July.
2. Aspects Casting Shadows
2A. Energy
- Regular Gasoline: +1.372%
- Diesel: +0.219%
- PPI data shows strong Y/Y increases:
- Electric power distribution +6.49%
- Industrial gas manufacturing +13.74%
These pressures on PPI will filter into consumer energy costs. Structural inefficiencies in U.S. electricity grids and distribution networks add further inflationary risks.
2B. Tariffs
Medical supplies already show tariff effects. Inventories provide a short buffer (approx. 4 months), but if NIFO accounting is applied instead of FIFO, consumer prices will reflect higher import costs sooner.
2C. Year-on-Year Comparison
The base effect matters: August 2024 saw only +0.08% vs July 2024. If August 2025 rises +0.15%, Y/Y CPI shifts from 2.70% to 2.78%.
PPI Data Influencing September CPI
Electric Power Distribution (Y/Y %)
- Residential: +5.42%
- Commercial: +9.90%
- Industrial: +8.99%
Natural Gas Distribution (Y/Y %)
- Ultimate consumers: +8.48%
- Residential: +12.70%
- Commercial: +11.94%
- Industrial: +13.92%
- Electric power: +0.74%
The issue is not production but distribution—aging grids and costly local delivery methods are raising consumer costs.
Market Expectations and Tech Sector Focus
Despite inflation uncertainties, market optimism remains centered on technology—particularly AI, semiconductors, software, and infrastructure. ORCL Open is the near-term focus, but AI will dominate long-term market narratives.
Public Finances and Fiscal Impact
FRB data show the Trump administration has improved fiscal receipts while curbing outlays:
- Total Receipts YTD (Aug 2025): +$324.5bn (+9.88%)
- Total Outlays YTD: +$205.1bn (+4.40%)
- Receipts April–Aug up +10.33%, led by Custom Duties (+278.9%).
- Outlays slowed significantly in April–Aug vs Jan–Mar.
This strengthens the Fed’s view on deficit sustainability, reducing issuance pressures. Fiscal reform (effective Dec 2025) plus rate cuts will reinforce systemic support for markets.
Effect of Tariffs on PPI
Stage analysis (Y/Y %):
| Stage | March | August |
|---|---|---|
| Final Demand | +3.15% | +2.60% |
| Stage 1 | +1.94% | +2.43% |
| Stage 2 | +2.64% | +0.61% |
| Stage 3 | +1.66% | +2.49% |
| Stage 4 | +2.56% | +3.11% |
Tariff pressures are most visible in later production stages (metals, food, industrial energy). Inventories have softened the impact so far, but Q4/25–Q3/26 will feel stronger inflationary effects.
A major risk: if the Supreme Court overturns Trump’s tariff authority, $250bn in tariff revenues would vanish—destabilizing public finances and debt sustainability. Current Republican court majority lowers this risk.