From Price Pressures to Job Losses: The Fed’s Balancing Act

Markets had their eyes firmly on last week’s U.S. inflation report for clues ahead of the Federal Reserve’s September meeting. While headline CPI ticked higher to 2.9% in August, much of the increase came from energy prices, with core inflation holding steady at 3.1%. At the same time, producer price inflation cooled sharply, suggesting that businesses are absorbing tariff-related costs rather than passing them on to consumers.

But the real story lies in the labour market. Revisions revealed significantly weaker job growth than initially reported, and jobless claims climbed to their highest level in four years. With unemployment edging up to 4.3% and participation rates continuing to drift lower, the Fed’s attention is shifting from inflation control to protecting jobs and growth. Markets are now increasingly pricing in imminent rate cuts.

Here are the key developments:

• Inflation

  • Headline CPI rose to 2.9% in August (from 2.7% in July).

  • Energy prices climbed 0.7% month-on-month, including a 1.9% jump in petrol.

  • Core CPI held steady at 3.1%, showing persistent underlying pressures.

    
    

• Producer Prices (PPI)

  • Fell sharply to 2.6%, well below forecasts of 3.3%.

  • Trade services inflation dropped 1.7% MoM, pointing to retailers absorbing costs.

  • Suggests tariff-driven pressures are being contained, at least for now.

    
    

• Labour Market

  • Revisions show 911,000 fewer jobs over the year to March 2025 than initially reported.

  • Jobless claims hit 263,000, the highest in four years (vs. forecasts of 231,000).

  • Unemployment at 4.3%, still below the long-term average of 5.7%.

  • Labour force participation slipped to 62.3% (from 62.7% a year ago).

    
    

• Fed Outlook & Bonds

  • Market is expecting atleast 2 rate cuts before year-end, with further easing in 2026.

  • The 10-year Treasury yield briefly touched 4.0%, its low for the year.

  • U.S. investment-grade bonds are up 6.5% year-to-date, outperforming their 4.9% starting yield.

    
    

Implications for Investors

• Expect volatility as markets digest Fed policy shifts.

• U.S. bonds remain more attractive than international peers

  
  

Key takeaway:

Stay disciplined. View pullbacks as opportunities to rebalance, diversify, and add quality exposure. With the Fed set to ease, now is the time to ensure your portfolio is aligned with your long-term goals, risk tolerance, and time horizon.