Truflation: US Monthly Inflation Report – September 2025

Executive Summary

The U.S. economy expanded at a faster pace than expected pace in Q2 2025, with GDP revised upward to 3.8% from the prior estimate of 3.3%. This marks the strongest quarterly growth in nearly two years. This surprise upside was primarily driven by a sharp contraction in imports, which narrowed the trade deficit and delivered a +4.83 percentage point boost from net exports, reversing the -4.68 point drag in Q1. The contraction in imports is largely attributed to inventory front loading in Q1 by businesses seeking to avoid the rising tariffs.  

Despite the trade being the headline driver, underlying domestic strength remains intact with consumer and business spending remaining strong, while labor market resilience continues to support domestic demand although signs for weakening are present. 

Exhibit 1 – Gross Domestic Product Percentage Change – Contribution to GDP 

Source: Bureau of Economic Analysis

Retail sales rose 0.6% month on month and 5.0% year on year, reflecting solid consumer demand. Business investment continues to accelerate, with equipment investment up 8.5% in August following a 0.8% gain in July. The strong fundamentals continue to support the positive GDP outlook with Atlanta Federal Reserve GDPNow predicting a 3.8% GDP growth in Q3.

The labor market remains resilient but is cooling. The initial jobless claims declined by 14,000 to 218,0000 in the week ending the 20th of September.  Job growth has slowed in three months to August but layoffs remain muted and corporate margins remain solid, with little signs of compression; indicating no immediate pressure for widespread cuts.  The current conditions does not seem to be a drag on the economy and is more a reflection of policy uncertainty than a downturn in demand.  

Inflation pressures continue to build as companies draw down on pre-tariff inventories and as inventory is replenished will face higher input costs.  This environment is reinforcing a more hawkish stance by the Federal Reserve with less scope for further rate cuts. 

Despite earlier market expectations for further easing, current macro conditions suggest rate cuts are at risk with strong GDP growth, contained labor conditions, firm consumer and business demand and rising inflationary pressures.  The Federal Reserve’s dual mandate increasingly points to a hold stand rather than continued easing. The Fed is caught between a delicate balance between growth and inflation but it is expected to reduce rates another 25bps in the upcoming meeting given the softening labor market.

Labor Market Stagnating amid Structural Strains

The labor market remained stagnant in September with hiring slowing further and the unemployment rate holding steady at 4.3%, according to estimates from the Chicago Federal Reserve. While a sharp rise in unemployment has not occurred, the loss of hiring momentum suggests the labor market is entering a period of prolonged softness.  

The Federal Reserve is closely monitoring these developments as it weighs a potential 25 basis point cut this month.  Although 4.3% unemployment remains consistent with full employment, the Fed’s policy calculus is shifting from cyclical concerns to the possibility of deeper structural challenges.

Exhibit 2 – Payroll job growth from 2010 to 2019 – Average payroll grew 160,586 from 2010 to 2019

Source: Bureau of Labor Statistics

The Private-sector data signals weakness, with the data revealing a more troubling picture. ADP reported a loss of 32,000 private-sector jobs in September, extending a decline that began in May. Intuit data from roughly 400,000 small businesses shows firms with fewer than 10 employees cut 48,000 jobs.

Challenger, Gray & Christmas reported a 37% month on month decline in job cuts (to 54,064), but total layoff announcements in 2025 have reached 946,426 which is the highest year to date level since 2020.  Combine this with hiring intentions which have collapsed, with just 204,939 positions announced year to date. This is the lowest level since 2009 when the economy was emerging from the Great Recession.

Despite weak hiring, GDP growth remains strong, pointing to a labor market constrained by more than just cyclical weakness rather than demand weakness. Several structural factors appear to be contributing to this stagnation:

• Stricter immigration policies have reduced the flow of foreign born workers who represent a key segment of the US labor force.

• The rapid adoption of AI and automation is shifting labor demand away from mid and low skill roles, impacting job creation in sectors historically seen as labor intensive.

• The political uncertainty, especially around tax policy, regulation and trade policy has made it harder for businesses to plan ahead, which has led to lower job switching activity. The uncertainty in itself doesn’t cause structural labor shifts but it makes it harder to manage and delays key decisions. 

Exhibit 3 – Foreign born share of the labor force (%)

Source: Bureau of Labor Statistics

Taken together, the data points to a labor market in transition with limited workforce participation and facing headwinds from evolving technology, demographics and policy shifts.  In the short term the unemployment rate may remain stable due to limited hiring and subdued separations. However the underlying softness is likely to keep the Federal Reserve cautious and the case for near term rate cut is strengthening.  Whether this stagnation evolves into a broader downturn or signals a new labor market equilibrium shaped by reduced demand and altered workforce needs remains uncertain.

Inflation Update – Goods-Led Price Pressure Intensifies

Truflation projects a 3.0% year on year rise in the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) for September, up slightly from 2.9% in August and broadly in line with market expectations (2.9% - 3.1%).  The uptick reflects mild but persistent upward pressure on prices, primarily driven by goods inflation and a volatile category of energy. 

Goods inflation is leading the charge as tariffs and depleted inventories are pushing goods prices higher, continuing a trend seen throughout Quarter 3.  Import prices rose again in August (+0.3% MoM) with early September data suggesting this trend is set to continue.  Energy prices, particularly for fuel and natural gas, contributed to headline inflation.

In contrast Core CPI (excluding food and energy) decelerated driven by weakness in the owned housing components, as high mortgage rates continue to weigh on affordability and suppress demand.  Services inflation has eased and now trails goods inflation, reflecting the sluggish labor market conditions and slower demand. 

Exhibit 4 – Truflation key inflationary metrics: Goods vs Services vs Core Inflation

The services sector as a whole is sluggish. The ISM Services PMI shows stalled growth in September as new orders slowed and employment remained weak.  Despite this, input costs in services continue to rise, albeit at a slower rate than goods, underscoring challenges in staffing and wage negotiations.

ISM Manufacturing PMI edged upwards towards recovery to 49.1 (from 48.7) but remained below 50 for the seventh consecutive month, signaling continued contraction.  Tariff pressures and weak new orders are still weighing output and hiring.

Exhibit 5 – Truflation Category Inflation Drivers

The most significant upward contributing categories to inflation in September were coming from utilities, apparel, alcohol & tobacco and household durables with communications, housing and food being the biggest downward contributors.

The steady increase in inflation is behaving as Truflation predicted at the beginning of the quarter and the tariff effects are expected to continue pushing prices higher in Quarter 4, especially as businesses replenish inventories.  Utilities and imported goods will remain under pressure with energy demand especially from AI / data centers driving utility prices higher.  

Sector-Specific Inflation Drivers

• Utilities: +2.2% MoM I +4.1% YoY. The Utilities sector has experienced broad based growth, but the surge in natural gas and fuel oil prices is the key driver. The rise can be largely attributed to demand, in particular for data centres supporting artificial intelligence infrastructure, tariffs, delays in adding new generators to the power grid etc all conspiring to create more expensive utility bills.  These variables are unlikely to be changing direction anytime soon.

• Apparel: +0.9% MoM I +2.9% YoY & Household Durables: +0.5% MoM I + 3.9% YoY. This surge for both categories is attributed to the end of the “de-minimis” exemption in August, which allowed items valued under $800 to be imported duty free. The elimination of this exception would specifically impact products that are physically smaller and could be packaged in bundles such as phones, gaming consoles, apparel, personal care items etc. Large sized goods, such as appliances, were unchanged after rising solidly in August.  Home improvement goods prices gains slowed.

• Alcohol & Tobacco: +0.9% MoM I +3.2% YoY.  This is due to tariffs on European wine and spirits combined with the 10% tax on Scottish whiskey.  Add Liquor stores replenishing stock, at higher prices are leading to higher costs for American consumers.

• Communications: -0.2% MoM I -1.2% YoY.  The category has continued its downward trend in September attributed to promotional pricing by mobile carriers, spurred by intense market competition and the broader price competition among hardware manufacturers and service providers.

• Housing: +0.0% MoM I +0.4% YoY.  A mixed picture in September, with overall prices holding steady, however a closer look reveals a stark contrast between the rental and owned segments:

• Rental prices rose +0.4% MoM, driven by continued seasonal demand during the peak moving months of May through September, a shortage of affordable vacant rental properties and landlords making up for historical rent freezes and steep discounts in the pandemic era by hiking prices on new and lease renewals.  New supply coming onto the market, lower mortgage rates will impact rental prices in the future.

• Owned property prices, by contrast fell -0.2% MoM, which is now the 3rd month in a row of price declines. It seems that the home price growth that has been reported in recent years has finally slowed down because of the current affordability constraints as well as elevated supply and uneven regional demand has continued to depress prices and sales across the country. However as mortgage rates are declining and more inventory coming to the market, we should see a boost in sales in the coming months. 

• Food: +0.0% MoM I +3.4% YoY.  Taking a  closer look reveals a stark contrast between the grocery and dining out segments. Grocery shoppers continue to struggle with high prices even though they have marginally dropped this month as consumers adjust their habits utilizing cost saving strategies that include shifting to value focussed retailers, opting for private labels products, taking advantage of promotions and purchasing items in bulk. The dining out prices have increased significantly and according to the National Restaurant association, menu prices rose 0.3% in September.  Labor shortages, weather conditions and tariffs are the culprits for higher prices. 

Inflation Outlook: Short to Medium Term

This upward pressure on inflation is expected to persist in the coming months which is driven by the tariff cost increases. Input costs remain under pressure as inventories are replenished at higher prices. The tariff uncertainty with China continues to weigh on supply chains and business pricing. However early tariff passthrough appears to be complete in select categories eg appliances, outdoor power equipment, etc reducing incremental inflation from these goods.

The fiscal stimulus via the One Big Beautiful Bill Act which includes the following characteristics:

• Permanent extension of the 2017 individual tax cuts

• New tax breaks on overtime, tips, and car loan interests for vehicles produced in the US (2025-2028)

• Increases the State and Local Tax (SALT) deduction cap from $10K to $40K, phasing out for high earners (over $500,000), benefiting higher-tax state residents.

• One-time $1,000 federal deposit for children under 18 for education, home purchases, or small business startups.

This is likely to boost consumer spending in the near term, increasing aggregated demand.  Industrial energy usage is expected to rise due to expanded production, further pushing up utility prices already under stress. Longer term outlook would suggest deflationary forces coming into play, especially deficit reduction components of OBBBA may lower long run inflation.  Increased industrial productivity from tax and investment incentives could expand supply capacity.  If wage growth stays contained, pass through inflation may also be capped.  High interest rates continue to suppress demand in housing and some durables acting as an anchor. 

Exhibit 6 – Consumer Inflation Expectations (2% is the Fed Target)

As a result it is not surprising to see the consumer inflation expectation, 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 September, the University of Michigan’s 12-month inflation expectation rose to 4.8%, while the New York Fed’s consumer inflation expectation increased to 3.4%, reinforcing the view that inflation concerns are here but are expected to cool in the coming months.

Conclusion: “Inflation is not yet behind us”

Upward inflationary risks are likely to persist into early 2026, especially due to supply chain restocking at higher cost, tariff uncertainty, energy driven price pressures and fiscal driven demand boosts from OBBBA.  The key question now becomes how resilient the consumer remains in supporting growth without re-igniting broader price spirals.  While there are signals inflation may cool gradually, current conditions suggest the Federal Reserve will remain cautious, with limited room for rate cuts unless inflation expectations shift decisively downward.

APPENDIX A

Truflation Category Percentage Change Data
Month-over-Month and Year-over-Year
All Data is based on September 2025

Truflation US Inflation Update - September 2025

Report Presentation Deck

TF 2025 - Inflation Report - US - M9 - Presentation.pptx.pdf

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About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 20 million product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.94% accuracy in predicting inflation in the last 12 months.