So if we assume markets are right on the September cut, inflation numbers can still dictate how quickly and at what magnitude the Fed cuts from here.

This morning, we got the last big data release ahead of the Fed's September rate decision. Headline inflation came in just a touch above expectations for the monthly change while core was right on the money. And that leaves headline inflation running two point nine percent year over year and core at three point one percent. Those numbers well above the Fed's two percent inflation target, but markets don't seem too worried. Marta, why do you think investors are are so sure that the Fed will move ahead with a cut next week?

It's because the labor market suddenly looks so much weaker. Remember, the Fed has two mandates, full employment, stable prices. Powell has said at moments like this one in which the two are in conflict, the Fed will focus on whichever mandate is furthest from its objectives. With payrolls adding few jobs this summer and looking increasingly weak after revisions adjust initial estimates, the market is arguing the labor market is moving furthest from its objective.

While jobs may be the bigger story right now, we know inflation still matters. So how did these numbers this morning factor into the Fed's decision?

So if we assume markets are right on the September cut, inflation numbers can still dictate how quickly and at what magnitude the Fed cuts from here. The Fed is gonna look at the overall numbers, and then it will look at contributors to inflation, at core goods, prices, for example, to get a sense of the tariff effect at shelter and importantly at core services x shelter, which has shown some stickiness in twenty twenty five.

Let's go a little bit deeper on tariffs. I know you've been watching this very closely. What did this report show us?

Well, food categories ran a bit hot this month, and those can be affected by tariffs. Within core goods, results are mixed. A larger gain in imperil, for example, while household furnishings saw a smaller gain than prior months. Appliances jumped a bit more. To get a better indication of the direction of travel, I like to zoom out and look at the year over year contribution of core goods to inflation relative to, say, what it was contributing twelve months ago. And that picture is a bit more stark. A year ago, core goods were a negative contributor to inflation, while this past month and in recent months, they've been notable positive contributors.

Interesting. So what about services? I noticed in your chart of the week that came out yesterday, you pointed out progress there really hasn't been as strong as we had hoped.

That's right. In this report, Bureau of Labor Statistics called out shelter as a notable driver of inflation this month. The super core services gauge, which strips out shelter, is up a bit less than in July. So that's marginally good news. But I think we'll wanna keep an eye on this trend since to your point, it seems to have stalled out over the summer.

Yeah. What could be driving that do you think, Martha?

It's it's not entirely clear at this point. It could just be data volatility without a big driver, or it could be that the economy just hasn't run out those last vestiges of inflation from the post pandemic surge. It could also relate to reduced labor supply due to Trump administration immigration policies, which could be keeping wages higher in certain sectors.

Yeah. Great perspective. It it may not be a single driver, but it's clearly something the Fed will be watching. So, Marta, what's your big picture takeaway from this morning's report?

Well, I'd say this report hardly prevents a September cut, but it also doesn't put inflation concerns to bed. We may not be seeing a lot of acceleration or anything that matches the deceleration we're seeing in the labor market, but we aren't seeing much progress either.

Marta, thanks so much for breaking this one down for us. Always appreciate the context and your longer term focus. And big thanks to all of you for joining us as well. Marta and I will be together at Empower Studio in Chicago next week to cover the Fed's decision, and we'll see you then.