Week Ahead Economic Preview: Week of 25 August 2025

US interest rate outlook under scrutiny amid inflation update

The Fed’s preferred measure of inflation is updated to hopefully add some clarity to the forward path for US interest rates alongside consumer spending, household confidence and durable goods orders. GDP updates are also provided for the US and Canada, as well as India, France and Italy. PMI data for mainland China will meanwhile be a key focus for APAC alongside tier one economic data for Japan and central bank policy meetings in South Korea and the Philippines.

At the time of writing, the market is pricing in a 70% chance of the FOMC reducing interest rates at its next policy meeting in September. To the increasing frustration of President Donald Trump, the Fed has held rates steady at 4.25-4.50% over the year-to-date so far, but the perception in the market is that the balance of power is shifting to the dovish side among FOMC members. It is likely, however, that the price gauges from the personal consumer expenditure (PCE) release, due on Friday, will need to bring some reassuring news on inflation to persuade the majority of policymakers that such an imminent rate cut is warranted.

To recap, June’s PCE data showed a 0.3% rise after a 0.2% gain in May. That took the annual rate of increase from 2.4% to 2.6%, so increasingly above the FOMC’s 2% target. Core PCE inflation held at 2.8%. Since then, consumer price inflation (CPI) data brought some relief by holding steady at 2.7% in July, but core CPI inflation accelerated to 3.1% and producer price inflation hit 3.3%, the highest since January.

Survey data have been even less encouraging for the doves. The latest data from S&P Global’s flash PMI surveys showed that average prices charged for goods and services rose in the US at the steepest rate for three years in August, building on especially strong rises in the prior three months. The price rises were overwhelmingly blamed on companies passing higher costs linked to tariffs through to customers.

Key to the consumer inflation outlook and Friday’s PCE data is therefore whether retailers and other consumer-facing firms will soak up some of these price increases through squeezed margins, or whether we will start to see some greater pass-through of tariff costs on to households. A further question is whether this tariff impact will merely cause a one-off lift in the price level, or lead to more entrenched, stickier inflation. It is likely that the answers to these questions will not be known before the September FOMC meeting, encouraging some scepticism that rates will be cut.

The US also once again reported by far the sharpest rise in prices of the major developed economies, blamed on tariffs, according to August’s flash PMI data.