MarketTrends 09/12/2025: Data's In, Decision's Next

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Whether those expectations prove out or not very much depends upon what happens to inflation and labor markets over the next few months. The latest updates on Producer and Consumer Price Indices for August were out this week; one provided a bit of optimism and the other a reason for caution.

The Producer Price Index for August was far more benign than expected, and came in with a decline of 0.1% where forecasts were looking for an increase of as much as 0.3%. The decline -- and a downward revision to July's originally-reported 0.9% increase to 0.7% -- was a surprise, as tariff-induced price pressures were expected to be seen again last month. Overall goods prices edged just 0.1% higher; less likely to be affected by tariff impacts, service prices retreated by 0.2%

The August decline in overall PPI helped trim the annual rate to 2.6%. While lower energy and food costs impacted the top-line figure, so-called core goods inflation was less sanguine, coming in with a 0.3% increase for the month. On an annual basis, core goods PPI stepped higher again to by two tenths of a percentage point to 2.9%. Using that same annual reference, PPI services costs are cooling while goods costs are rising. Higher input costs may again start to be reflected in the PPI series as inventories of lower-cost pre-tariff goods must eventually be replaced with higher-cost, post-tariff ones.

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Of course, the measure of costs at the producer level doesn't reveal the whole inflation picture, and prices at the consumer level suggest that the Fed's decision to lower rates next week may be more contentious than you might expect. The overall Consumer Price Index (CPI) for August rose by 0.4%, rather more than was expected to be seen, and consumer prices over the last year increased by 0.2% to a 2.9% annual rate, the highest annual rate since January. While food inputs and energy may have had a tempering effect on producer prices, that wasn't the case for consumer prices, as these rose by 0.5% and 0.7% for the month, respectively. Even excluding them, the core rate of inflation wasn't much tamer, rising by 0.3% last month, keeping so-called "core" CPI at a 3.1% annual rate.

In the components of core CPI, goods prices moved higher again. Although the current 1.5% annual rate isn't worrisome, the trend is, as core goods prices were actually declining as recently as March; moreover, the current yearly rate is the highest it has been in about two-and-a-half years. Meanwhile, core service costs held at a 3.6% annual rate for a fifth consecutive month. While not the Fed's preferred measure of inflation, Core CPI does contain many of the same inputs as does the PCE series the central bank follows more closely. At last look -- for July -- core PCE was at a 2.9% annual pace. Given the CPI update, core PCE seems likely to tick higher and move further away from the Fed's 2% goal for inflation.

The recent labor market data all but cements a cut by the Fed of some size. Going into this week, we already knew that hiring over the summer was quite slack and that the unemployment rate had edged higher to 4.3% in August, largely from a labor force that expanded again after three months of contraction. We also suspected that the annual benchmark revision to hiring figures for the April 2024-March 2025 period would subtract some jobs from those previously-published tallies, but 911,000 hires thought to have occurred over that time period vanished on Tuesday, a record-size revision. This means that not only was summer hiring soft, but that hiring has actually been sluggish at best for perhaps the last year and a half. The annual benchmark revision erased about half of the jobs over April 2024-March 2025 period, leaving an average of just over 70,000 hires per month over that time. Extrapolating the revision over the April through August 2025 period this year would make more recent hiring figures even more meager than they already were.

The good news of sorts is that last year's originally-reported 818,000 initial re-benchmark reduction was eventually revised to "only" 598,000 ghost positions, and there's a reasonable chance that this year's figure will be pulled down somewhat, too. An estimate from a Goldman Sachs model puts it at a final revision of perhaps 550K, so not far off the '23-'24 pace, but still a considerable drag on the originally-reported figures.

Slack hiring of course concerns the Fed, but they may care more about worker layoffs, and those have been reliably low for a while. However, it's not clear whether this is starting to change or not; at least until the week ending August 30, initial requests for unemployment benefits were perking along at a low and unconcerning level. That said, initial claims flared higher in the week ending September 6, with the 27,000 increase putting the total at 263,000, the highest number in nearly four years. Texas posted a big increase, and the ever-shifting Labor Day holiday week may also have injected some holiday-adjustment issues, but the turn higher here bears close observation. Meanwhile, the number of folks receiving ongoing benefits remained a 1.939 million, close to a three-year higher but a bit below a late-July peak.

The Fed goes into their meeting with an economy that is still exhibiting overall strength despite some signs of distress or areas of concern. The latest running estimates for GDP growth from the Federal Reserve Bank of Atlanta's GDPNow model and the New York Fed's Nowcast model don't quite agree, but both signal fair to solid activity, reckoning third quarter GDP at 3.10% or 2.08%, respectively. Split the difference, and the 2.59% median rate between them is certainly indicative of an economy in pretty good shape overall.

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Inventory levels at the nation's wholesaling firms expanded by 0.1% in July, but the rise was all due to an increase in non-durable goods stocks. Durable holdings decreased by 0.2% for the month while non-durables rose by 0.7%. Sales were actually quite strong, rising by 1.4%, a second solid bump after a May decline. Given the present rate of sales, the inventory-to-sales ratio slipped to 1.28 months of stock on hand; by this measure, this is the thinnest that holdings have been since June 2022, and hopefully may spur some orders to manufacturers despite what appears to be a cautious business climate.

In its largest spurt since last December, consumer borrowing kicked higher in July, rising by $16.0 billion. Additions to revolving credit balances (e.g. credit cards) led the way with a $10.5 billion increase, while installment-type borrowing (car, personal, education loans) saw just a $5.5b rise in outstandings. It may be that a burst of vacation and back-to-school spending powered the use of credit cards, and to the extent that it was, some retreat would be expected to be seen in August, just as there was an after-the-holidays drop off in January.

That's especially the case if consumers are becoming more concerned about their financial situations. At least as gauged by consumer moods, those concerns are rising; the Consumer Sentiment barometer from the University of Michigan started September with a 2.8-point retreat, landing at 55.4 in the preliminary poll. While current conditions only eased slightly with a half-point dip leaving it at a soggy 61.2, a larger decline was seen in the expectations portion, where a 4.1-point slide left it at just 51.8 so far this month, and again approaching an all-time low. The summary from Director of Surveys Joanne Hsu noted that "Consumers continue to note multiple vulnerabilities in the economy, with rising risks to business conditions, labor markets, and inflation." Respondents polled expect to see inflation of 4.8% over the next year, the same as in August, but 3.9% over the next five years, up from a reckoned 3.5% just two weeks ago.

Last week's employment report for August helped long-term yields to decline a fair bit, and the downturn in yields dragged mortgage rates down along with it, spurring a rise in applications for mortgage credit. With this week's downward revisions to hiring and uptick in initial claims helping the influential yield on the 10-year Treasury to flirt with the 4% mark during a couple of trading sessions this week, we'd expect to see even more of this activity next week. For the week ending September 5, the Mortgage Bankers Association reported a 9.2% increase in requests for mortgages, lifted by a 6.6% increase in applications for funds to purchase homes and a 12.2% bump in those to refinance existing mortgages. This week's leg down for mortgage rates should see refinance activity pick up smartly, and if rates can manage to remain around these levels for a time, home sales activity may firm up a bit this fall, too.

The Fed next week needs to vote on rates based upon what it is seeing, and forecast what it expects to see. Although the view backwards may now be sharper and the one ahead perhaps less murky than a few months ago, clarity is still at a premium. A sluggish labor market isn't the same as a contracting one, and still near-full employment isn't the same as a labor market in sharp decline. Inflation not showing in one measure doesn't mean it doesn't exist, and inflation showing in another doesn't mean it will skyrocket from here. If the impediment to greater hiring is uncertainty about the business climate, it's by no means certain that slightly lower interest rates will revive hiring to any great degree. Conversely, if inflation is firming and more is waiting in the wings, lower rates could make it harder for the Fed to get inflation down to something approximating price stability.

For those looking for mortgage rates to plummet further in the near term, odds don't favor it unless there is a more serious downturn in the economy or in labor markets. Even if it is happening, we'll need to wait to see it in the data, and that won't start to show for some weeks at a minimum. Even if rates should decline meaningfully from here, they will still be "stuck" at about 10-month lows, as it will take another 4 basis point drop just to move to the next 10-month-low step (week of October 11, 2024), then another 20 lower to move to the week of October 4, 2024... and then another four basis points on top of those to get below last year's 6.08% bottom. If that should all take place, rates would then be at three-year lows, with 30-year fixed rates still about 6%.

While what the Fed forecasts and says may help nudge us in that direction, it's probably not happening next week. Based on how bond yields behaved at the end of this week, it looks as though we'll see little change for the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac. Something between a two basis point decline and a two basis point increase seems about right when Thursday comes rolling along.

As the darkness again creeps in and cooler temps begin to show, what's the outlook for mortgage rates? See our latest Two-Month Forecast for mortgage rates covering September and October.

You can also check out the mid-year review to our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.

Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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