2026 Inflation Study

In August 2025, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) climbed 2.9% year‑over‑year, up from 2.7% in July, the biggest annual rise since January. On a monthly basis, headline CPI increased 0.4%, compared to 0.2% in July.

The core CPI measure—excluding food and energy—remained steady at 3.1% year‑over‑year, same as July. Month‑to‑month core prices rose 0.3%. Key cost pressures came from shelter, food, travel (airfares, hotels), and rising prices of goods impacted by tariffs, such as used vehicles and apparel.

The uptick in headline inflation to 2.9%, while core remains high, signals that inflation is not yet fully moderating. The persistence of price increases—especially in essential and sticky categories—makes the Federal Reserve’s decision to cut rates more complicated.

Markets had been expecting a rate cut in September. The stronger‑than‑expected inflation could temper expectations or force the Fed to signal more caution, even if they proceed with a modest cut. Weakness in the labor market (e.g. rising unemployment, soft job growth) adds another layer of uncertainty.

The current federal funds target range is 4.25%–4.50%. Despite the inflation bump, the consensus among many observers is that the Fed will deliver a 25 basis point rate cut at its September 16‑17 meeting.

Bank of America, among others, projects two 25 bp cuts in 2025 (September and December), with potential for more in 2026 if inflation persists and labor softens further. Some analysts suggest the Fed might delay additional cuts depending on upcoming economic data.

Although headline inflation ticked up, the Fed has indicated its decision will depend on core inflation trends and labor market softness. Flexible CPI categories suggest temporary volatility, while sticky inflation continues to challenge their 2% target framework.

The August 2025 inflation data showed a continued divergence between sticky and flexible prices. Core sticky CPI—which excludes food and energy and tracks slow-moving categories like rent and healthcare—remained elevated at 3.4% year-over-year, unchanged from July. This suggests entrenched inflation in key service areas that are less responsive to interest rate shifts.

Flexible CPI, which covers more volatile categories like gasoline, airfares, and groceries, jumped to 1.6% in August from 0.8% in July. The increase reflects a resurgence in short-term price pressures, particularly in goods impacted by supply chains, global energy markets, and recently imposed tariffs on imported consumer products. Categories such as apparel, electronics, and used vehicles have seen price increases that align with these trade policy effects.

The chart below illustrates this divergence. While flexible CPI fluctuates more sharply and can rise or fall with short-term shocks, sticky CPI moves slowly but holds steady at higher levels—highlighting the challenge for the Fed in bringing overall inflation down to its 2% target. These sticky categories—like rent, insurance, medical care, and education—tend to be shaped by long-term contracts, regulatory pricing, or labor-intensive business models. As a result, their prices don’t adjust quickly in response to higher interest rates, making them slower to deflate even as other parts of the economy cool.

Real average weekly earnings for all employees increased 0.4% from August 2024 to August 2025, seasonally adjusted, according to the Bureau of Labor Statistics. This modest gain reflects a 0.7% rise in real hourly earnings combined with a 0.3% decrease in the average workweek. On a monthly basis, real weekly earnings declined by 0.1% in August due to inflation outpacing nominal wage growth.

For production and nonsupervisory employees, the year-over-year gain in real weekly earnings was more robust at 1.1%. This segment saw stronger nominal wage growth and no change in the average workweek, helping boost real incomes.

Still, the overall pace of real wage growth has slowed compared to earlier in 2025, when monthly gains were larger. The uptick in August inflation narrowed the gap between wage gains and rising prices, raising concerns for consumers managing essentials like food, shelter, and energy.

The chart below illustrates how real earnings have changed over time. While the trend remains positive compared to the inflation peak in 2022, August’s report highlights how fragile that progress remains.

Real disposable personal income per capita rose to $52,139 in July 2025, up from $52,044 in June. This $95 month-over-month increase reflects stable wage growth and earlier months of easing inflation, helping restore some purchasing power for U.S. households.

While the gain is encouraging, August’s inflation rebound may weigh on future growth. The latest figure still falls short of the peaks reached during the 2020–2021 stimulus period, suggesting households are not fully back to pre-inflation comfort levels.

The chart below illustrates the longer-term trajectory of real disposable income. It highlights the initial surge from stimulus payments, the 2022 drop from inflation shocks, and the slow, steady climb since early 2023.

Food, energy, and travel categories—excluded from core CPI—rose sharply in August, lifting the overall inflation rate even though core components remained stable.

Most analysts expect a 25 basis point cut, but the Fed could delay or slow further cuts if inflation remains sticky.

Shelter, travel, groceries, and tariff-impacted goods like apparel and vehicles continue to exert upward price pressure.

The June Summary of Economic Projections shows inflation gradually declining, but staying above the 2% target through 2026, suggesting a slow easing cycle.