Truflation: US Monthly Inflation Report – August 2025

Executive Summary

The US economy grew at a faster pace than initially estimated in the second quarter of the year, with GDP revised up to 3.3% from the preliminary 3.0%. This upward revision was primarily driven by a decline in imports (which subtract from GDP calculations), an increase in business investment in intellectual property (notable artificial intelligence) and a marginal rise in consumer spending, likely reflecting higher prices rather than increased consumption volume.

However this growth raises the question about sustainability.  The reduction in imports, partly a consequence of tariffs, may distort the true picture of economic health.  As the effects of import duties become more entrenched, their negative impact could become more apparent in the quarters ahead.

Retail sales in July rose by a solid 0.5%, following a 0.9% increase in June. Growth was supported by strong demand for motor vehicles and promotional activity by major retailers such as Amazon.com and Walmart.  However a softening labor market and rising goods prices may pose headwinds to consumer spending in the third quarter.

Exhibit 1 – Monthly Retail Sales & Consumer Spending growth (MoM) compared to Truflation (YoY)

Source: US Census Bureau, Bureau of Economic Analysis & Truflation

The strength in retail sales and the latest Q3 GDP Nowcast of 3.0% have temporarily eased concerns over a potential stall in economic activity, especially in light of weak employment growth over the past four months. Yet, consumer behavior suggests caution: spending on discretionary items such as dining out and hotel stays has declined, even during peak summer months. This pattern points to households adjusting their budgets under growing financial pressure. A persistently moderating labor market is likely to make consumers more selective in their spending decisions.

Businesses, meanwhile, have been drawing down inventories accumulated prior to the implementation of tariffs, which are now affecting cost structures. While some firms have absorbed these costs, many are beginning to pass them on to consumers. According to the Richmond Fed Survey, 45% of companies have already raised prices and expect to do so again, while an additional 24% plan to increase prices in the near future.  In addition to this, 25% of businesses expect to begin raising prices in September. Among those who have already implemented price increases, 25% plan to raise again in August with another 25% expecting to do so in September.  This highlights the continued pass through of cost pressures particularly from tariffs and supply chain adjustments to consumers.  The staggered nature of these pricing plans suggest inflationary momentum may persist into the coming months, adding complexity for the Federal Reserve policy decisions.

Exhibit 2 – Percent of firm raising prices due to tariffs & when they might implement price increases

Source: Richmond Federal Reserve Survey

Labor market conditions continue to weaken, with job growth slowing further in August and the unemployment rate rising to 4.3%, highest level in nearly four years. This ongoing deterioration is reinforcing concerns and appears to be influencing monetary policy expectations.

Given the Federal Reserve's dual mandate of price stability and maximum employment, the growing risks in the labor market are likely contributing to market expectations of a rate cut. According to CMC FedWatch, 98% of market participants anticipate a 25 basis point cut to the benchmark interest rate, currently at 4.25 -- 4.50% since December of last year. This anticipated move would represent a measured response to evolving economic risks rather than a shift in broader monetary policy stance. However, inflationary pressures remain a key threat, complicating the Fed’s path forward.

Weakening Labor market

The August Employment Situation Report showed a sharp deceleration in job creation, with only 22,000 jobs added; marking a significant slowdown from the previous month. This trend is echoed in the private sector data from ADP, which reported 54,000 new jobs, nearly half the number added in July. Over the past four months, job growth has been tepid, with the healthcare sector contributing the majority of new positions.

Exhibit 3 – Changes in the total nonfarm payroll by Month & Rolling 3 Month Averages.

Source: Employment Situation Report, Bureau of Labor & Statistics

If we look deeper into blue collar employment, we can see significant signs of stagnation, with job levels in manufacturing, transportation, and warehousing falling to their lowest point since the onset of the pandemic. These sectors are experiencing the fastest rates of job loss, highlighting growing vulnerabilities in the goods-producing economy.

Exhibit 4 – Changes in the Blue Collar payroll by MoM

Source: Employment Situation Report, Bureau of Labor & Statistics

The healthcare sector added 31,000 jobs in August, falling short of its 12-month average of 42,000 jobs per month, suggesting a slight deceleration in growth. The leisure and hospitality sector contributed 28,000 jobs, maintaining moderate momentum. On the other hand, the government sector cut 16,000 jobs, bringing total government job losses to 97,000 since January, largely due to significant federal spending reductions initiated by the White House. A further sharp decline is anticipated in October, as employees currently receiving severance packages are expected to fall off payrolls. Meanwhile, the manufacturing sector lost 12,000 jobs, marking the fourth consecutive month of job reductions, highlighting the mounting pressure from tariffs and weakening demand.

Initial and continued unemployment claims remain elevated, reinforcing the view that displaced workers are struggling to find re-employment. This persistent friction in the labor market underscores weakening labor demand and elongates the average job search duration.

Despite the slowdown in hiring, average hourly earnings rose 0.3% in August, in line with expectations. However, on a year-over-year basis, wage growth came in at 3.7%, slightly below the 3.8% forecast. This suggests that while wages are still rising, momentum may be softening in parallel with broader employment trends.

Exhibit 5 – Changes in the Wages YoY

Source: Bureau of Labor & Statistics, Bureau of Economic Analysis and ADP

Although broader economic indicators continue to reflect expansion, the deteriorating labor market is sounding a more urgent warning. The dual impact of tariffs and artificial intelligence-driven automation appears to be reshaping the employment landscape, particularly in traditional labor-intensive sectors.

Given the ongoing job market weakness, a rate cut in September is increasingly likely and may pave the way for multiple cuts through the end of 2025. These developments will be closely watched by policymakers balancing inflation risks with emerging labor market slack.

Household Debt and Credit Status

The latest total household debt increased by $185 billion to 18.39 trillion in the second quarter of 2025, according to the latest Quarterly Report on Household Debt and Credit. The main driver of this increase was mortgage which increased $131 billion as a result of the continued high interest rates.

Credit card balances also rose by $27 billion from the previous quarter to stand at $1.21 trillion with a continued record number of accounts that are now open (636 million accounts). At the same time we are seeing elevated delinquency rates for credit cards, The New York Fed report found that 6.93% of all balances are transitioning to delinquency.

Exhibit 6 – Household Credit Card debt in Trillions of $ – Total balance I Q1-2018 to Q2-2025

Source: Household Debt and Credit Report, Federal Bank of New York

Credit Card debt has remained stable for decades, however in the years post pandemic, households largely spent down their excess savings while the cost of livings jumped, which sparked a rebound in credit card balances.   Data from Equifax found that subprime borrowers (those with a credit score of 600 or below) are showing signs of strain, with rising share of the overall debt.  Many of these borrowers are younger cardholders with shorter credit histories.   This group of cardholders account for 46%. There is a huge difference between someone who uses credit cards for rewards and convenience versus someone who is carrying pricey debt for years.  By way of example, with the annual percentage rates of just over 20%, if you made minimum payments towards the average credit card balance ($6,371), it would take you more than 18 years to pay off the debt and cost you $9,259 in interest over that time period.

The overall delinquency rates (in some sort of delinquency) rose to 4.4% in Q2 of 2025. This increase is particularly evident among the 90 and 120+ days late as consumers look to push out the repayments but are struggling to manage this in the current macro environment.

Delinquency rates of 90+ days are seeing an increase in Student loans which have continued to rise sharply, while credit cards and auto loans remain elevated but stable. Current interest rates and increased reliance on credit cards will increase the pressure on the repayment of that debt.

Exhibit 7 – Percentage of Balance 90+ days delinquent by Loan Type

Source: Household Debt and Credit Report, Federal Bank of New York

This increase in the delinquency rates is not only restricted to the younger age groups and in fact is increasing across each of the age groups.

Exhibit 8 – Percentage of Balance 90+ days delinquent by Age

Source: Household Debt and Credit Report, Federal Bank of New York

While the aggregate debt balance is up, Americans’ disposable income has grown as well but there are going to be plenty of household that are struggling under the weight of higher prices and high interest rates. The risk here is that the strong economy will mask those vulnerability and how much further the delinquencies rise up with the impact of tariffs and macro instabilities.   Cutting interest rates will help those vulnerable consumer groups.

Consumer confidence unsurprisingly has weakened in August but in the months ahead how much of this weakening labor market, increasing delinquencies, impact from the higher tariffs effect confidence and in turn effect a scale back of discretionary purchases to cope with the rising costs?

Exhibit 9 – Truflation Consumer Confidence

Recent inflation trends

Truflation projects that the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) for August will show a year-over-year increase of 2.8%, up from 2.7% in July. This forecast is broadly in line with market expectations, which currently range between 2.7% and 2.9%, suggesting a mild upward pressure on inflation.

The primary driver of this acceleration continues to be the prices of goods, which have shown renewed strength. In addition, the typically volatile categories of food and energy have seen noticeable price increases, contributing to the overall rise in headline inflation.

In contrast, core inflation, which excludes food and energy, has experienced a slight decline, largely attributed to housing-related components, as high interest rates continue to weigh on affordability and suppress demand. Services inflation has begun to decelerate, though it remains significantly higher than goods inflation, reflecting the ongoing resilience in labor-intensive sectors which in the recent months has experienced a softening.

Exhibit 10 – Truflation key inflationary metrics: Goods vs Services vs Core Inflation

The services sector activity has picked up in August and is the third consecutive month in which it grew but employment concerns remain subdued as the labor market conditions continue to ease. The Institute for Supply Management said its Services purchasing managers index increased to 52.0 from 50.1 in July. The prices index registered a 0.7% decrease from July release.  This level of growth showed greater consistent strength, which was evident across 12 sectors. 

Manufacturing on the other hand contracted for the 6th straight month in August, with suppliers taking the longest time in nearly three years to deliver input amid tariffs.  Prices remained in the increasing territory as a result of the import duties and it being difficult for businesses to plan ahead. 

At Truflation we are continuing to see inflation continue a steady increase which we believe will increase further in the coming months.  

Exhibit 11 – Truflation Category Inflation Drivers

With the inflation marginally increasing and with the risks to the upside accelerating, the most significant upward contributing categories to inflation in August were coming from food, utilities, health and household durables with housing, transportation and communications being the biggest downward contributors. 

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Looking ahead: inflation Pressures Likely to Persist in the Short term 

Looking beyond August, expectations for a continued rise in inflation are being reinforced by recent data on import prices, which exclude the impact of tariffs. Import prices increased by 0.4% in July, driven largely by a notable rise in the cost of consumer goods.

Exhibit 12 – Monthly change in US Import Price Index

Source: Bureau of Labor & Statistics 

This uptick suggests that exporting nations are not absorbing the impact of tariffs by cutting their prices. Instead, the higher costs are being passed directly onto U.S. companies and, ultimately, consumers. This dynamic indicates that tariff-related inflationary pressures could continue to build in the coming months, further complicating the inflation outlook and placing upward pressure on consumer prices.

This upward pressure on inflation is expected to persist in the coming months, particularly as tariff negotiations near resolution with key trading partners such as China, Mexico, and Canada. The uncertainty surrounding these negotiations, coupled with ongoing supply chain disruptions and shipping delays, continues to weigh on the manufacturing sector and exacerbate input cost pressures.

Consumer inflation expectations, essentially a measure of public concern about future price increases, have also been impacted. The perception that corporations are passing higher import costs onto consumers is contributing to growing anxiety around price stability. In August, the University of Michigan’s 12-month inflation expectation rose by 0.3 basis points, while the New York Fed’s consumer inflation expectation increased by 0.1 basis points, reinforcing the view that inflation concerns are beginning to re-emerge among households.

Exhibit 13 – Consumer Inflation Expectations (2% is the Fed Target)

Source: University of Michigan & Federal Reserve Bank of New York

Higher inflation expectations can also be self fulfilling, as Americans think prices will rise and they can take steps that push up costs further, such as asking for higher wages.  As for now wages have been cooling.  You combine this with the overall employment market, we are likely to see more upward inflationary pressures on goods. This is a story about inflation as well as about economic growth.

Conclusion

In the short to medium term, we are going to continue to see upward inflationary risk with the continued question of how resilient the consumer remains supporting growth with increased indicators that are increasingly sending louder alarm bells of caution.

APPENDIX A

Truflation Category Percentage Change Data

Month-over-Month and Year-over-Year

All Data is based on August 2025