Happy August and Happy Back to School month! Every year we get to this point, and every year I find it hard to believe we’re already here! My wife has been back in her classroom getting it ready for the 8th graders, and parents everywhere are ready for some semblance of a routine again.
In the markets, July’s Consumer Price Index (CPI) increased 2.7% year-over-year, matching June’s pace and coming in slightly below economists’ forecasts. This stability in headline inflation was largely supported by price declines or stabilization in the categories most visible to consumers—shelter, energy, and groceries. These areas tend to carry the greatest weight in public perception of inflation, so their moderation helped keep overall sentiment steady.
However, beneath the surface, certain categories experienced noticeable price increases. Furniture, tires, and pet products all saw higher costs, a trend likely tied to the ongoing implementation of tariffs. While these tariffs have not yet hit consumers with their full force, the pass-through effect is starting to emerge. As David Kelly, Chief Global Strategist at JPMorgan, notes, “because importers pay the tariffs first, they appear to be shouldering most of the cost of the tariffs so far…. [but] most of the cost will, eventually, be passed on to consumers.”
Kelly also provides a longer-term outlook on inflation. Assuming no additional tariff increases or new fiscal stimulus measures, he anticipates that year-over-year CPI inflation will climb from 2.8% in July to 3.5% by the fourth quarter of 2025, before gradually easing back to 2.8% by late 2026. These projections underscore that while near-term inflation remains contained, upward pressures are likely to resurface over the next 18 months.
The tariff picture remains a moving target. New trade agreements, sector-specific exemptions, and evolving geopolitical developments make it difficult to quantify the exact inflationary impact. Each passing month, however, provides more clarity on how these measures will ripple through supply chains and consumer prices.
Monetary policy is poised to shift. The Federal Reserve is expected to cut interest rates in September and again in December, assuming no material changes in economic conditions. These rate cuts may provide a tailwind for equity markets, supporting valuations and investor sentiment. However, they could also spur additional consumer spending, potentially increasing demand and putting renewed upward pressure on prices.
Alternatively, the economy could continue expanding at a steady pace, with inflation remaining within the Fed’s target range—a scenario that would be welcomed by policymakers and markets alike. In either case, the range of possible outcomes highlights the importance of preparation and portfolio resilience.
In navigating this environment, a disciplined investment approach remains critical. Maintaining a well-diversified mix of U.S. and international assets can help balance economic risks and capture global growth opportunities. Regular portfolio rebalancing ensures allocations remain aligned with long-term objectives, avoiding unintended concentration in any one sector, style, or geography.
While inflation trends, tariff impacts, and Fed policy will continue to dominate market narratives in the months ahead, long-term investors benefit most from staying focused on fundamentals and, more importantly, staying invested. The path forward will likely feature both opportunities and challenges—but with a balanced strategy, investors can position themselves to weather volatility and participate in future growth and PDS will continue to monitor and review portfolios along the way.
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