What’s Next for the Market? U.S. CPI August 2025 Report: Key Insights (feat. Fed’s Bold Moves & Economic Rollercoaster)

The U.S. CPI for July 2025 is about to be released shortly.

The big question everyone is asking: Will it hit 3.0% again?

Back in February 2025, the CPI was 3.1%, then it dropped to 2.8% in March and held steady at 2.8% through May. In June, it bumped up slightly to 2.9%.

If this time we see a CPI around 3%, the market will definitely react.

2% and 3% CPI figures just don’t feel the same.

But honestly, the PCE report coming out on August 29 will be even more important than the CPI.

On March 28, 2025, the U.S. stock market had a major shakeup.

That day, the U.S. 10-year Treasury yield dropped 2.65% in a single day, sending bond prices soaring.

For bond traders, when long-term bond prices move like that in one day, it’s like hitting their annual profit target in one go.

In stock market terms, it’s like hitting the daily limit price.

This big market move was mostly triggered by the PCE report.

The Federal Reserve actually pays more attention to the PCE than the CPI.

You could tell that just from Jerome Powell’s speech at the Jackson Hole meeting in 2023.

Back then, Powell said something along these lines:

“I still see inflation as too high. It’s coming down slowly, but we’ve got a long way to go.

I’m focusing on the core PCE, not the CPI.

The core PCE is still too high and hasn’t decreased much.

If needed, I might raise rates further, so stay alert.

It’s kind of surprising that the economy is still doing well despite all the rate hikes.

The economy isn’t cooling down, and unemployment isn’t rising, so we can keep tightening without much worry.

You guys are talking about 3% or neutral rates, but my goal is to get inflation to 2%.

If we don’t tighten enough, inflation could get stuck. But if we tighten too much, we risk harming the economy, so we’ve got to be careful with this.

Honestly, I don’t have all the answers. It’s like driving through fog while trying to see the stars.

I’ll make rate decisions based on the data as it comes in.”

Powell often says he’s focusing on the core PCE, not the CPI, when making decisions.

This time at the Jackson Hole meeting, Powell will probably focus on the CPI, but if the CPI hits 3.0% and the PCE is high too, the September Fed meeting could look very different.

CPI grabs a lot of attention because it’s released first, ahead of the PCE.

But it has its drawbacks, which is why the Fed doesn’t rely on it too much internally.

CPI tracks the prices of goods in the consumer’s shopping basket, but one big flaw is that it changes the items in the basket once a year.

For example, if the price of coffee increases, people might switch to tea or any other beverage. When the prices of certain products rise sharply, consumers tend to look for other options to maintain their budget.

This is called the substitution effect.

Since the CPI changes its basket of items annually, it’s tough to measure this effect accurately, which can distort inflation data.

PCE, on the other hand, changes its basket every month, which reduces the impact of the substitution effect.

That’s one reason the Fed prefers to use the PCE (Personal Consumption Expenditures Price Index) over the CPI.

The PCE is released on the last Friday of each month, which means it often gets overshadowed by the CPI, since the CPI comes out about 10 days earlier and gets all the attention.

But when Powell talks about targeting 2% inflation, he’s referring to the PCE, not the CPI.

PCE is different from CPI not just because of the items in the basket, but also in how it works.

CPI measures what consumers spend directly from their wallets, while PCE includes what third parties—like employers—spend on behalf of consumers.

A key example is health insurance premiums.

Health insurance paid by employers isn’t included in the CPI, but it is included in the PCE.

For instance, healthcare costs make up 8.4% of the CPI, but they account for 22.1% of the PCE.

This is where the hidden details of the PCE come in.

Healthcare spending alone makes up 22.1% of the total PCE, and cutting healthcare costs is no easy feat.

Besides healthcare, PCE also includes costs like dining out and other services, which are harder to reduce.

This makes the Fed’s goal of reducing PCE inflation to 2% much more difficult to achieve.

Trump has been putting pressure on pharmaceutical companies to lower drug prices significantly.

If drug prices drop, it would lower the healthcare costs included in the PCE, helping to bring the overall PCE inflation down.

Despite Trump’s sometimes outrageous actions, there’s usually a hidden purpose behind them.

Jackson Hole & PCE: Powell’s ‘Dovish’ Moves May Be Just the Calm Before the Real Storm

Here’s a quick take: Between the CPI and PCE reports, we’ve got the Jackson Hole meeting on the horizon. Powell will be stepping in there with only the CPI numbers to back him up. Even if he gives a dovish speech at Jackson Hole, don’t get too comfortable—there’s still the PCE hurdle ahead. Inflation’s leading indicators are already starting to show some movement, so the real test is just around the corner. Keep your eyes on the PCE, because that’s where the real fireworks could be.