The US Consumer Price Index (CPI) for August 2025 rose by 2.9% over the year, the highest rate since January of this year. Previously, the CPI stood at 2.7%, with a month-over-month increase of 0.4%, compared to an expected 0.3% (an unrounded consensus of 0.36%). Core CPI remained steady at a yearly increase of 3.1%, with a monthly rise of 0.3%. The unrounded monthly figure was 0.346%, showing a slight increase from 0.228%. Real weekly earnings decreased by 0.1%, down from a previous 0.4% which was later revised to 0.1%.

Core Goods And Services

Core goods prices went up by 0.3%, compared to 0.2% before, while core services also increased by 0.3%, down from 0.4%. Core services, excluding shelter and rent, saw slight drops to 0.2% from 0.3%. Owners’ equivalent rent climbed to 0.4% from 0.3%. This report indicates challenges in achieving inflation targets, especially with falling oil prices and recent rises in initial jobless claims. Today’s inflation data was hotter than expected for the month, making a large 50 basis point rate cut from the Federal Reserve unlikely. The unrounded core CPI figure was notably strong, indicating persistent price pressures. This suggests the Fed will need to be cautious and rely on data moving forward. This ongoing inflation occurs alongside a weakening labor market, creating a tough situation for the central bank. For example, initial jobless claims surged to 265,000, the highest since late 2024. This mixture of stubborn inflation and rising unemployment is likely to cause significant market volatility.

Impact On Trading

For traders focused on short-term interest rates, this means that positions predicting aggressive cuts should be reassessed. There may be pressure on Fed Funds futures contracts in upcoming meetings. The market might now expect rates to remain higher for a longer period than previously thought. With increased uncertainty, options premiums are expected to rise. The CBOE Volatility Index (VIX), currently around 17, could rise back to the 20 level, echoing patterns from the inflation battle of 2022 and 2023. This makes buying volatility through tools like VIX calls or index straddles an appealing strategy to protect against sharp market moves in either direction. Further down the line, the market still anticipates eventual rate cuts through 2026 due to weakening economic data like jobless claims. This sets up a potential yield curve steepener trade, where traders bet that long-term rates will drop faster than short-term rates. We believe the market is correctly predicting that a slowing economy will eventually prompt the Fed to act, but not in the near term. Create your live VT Markets account and start trading now.

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