What Changed?
Inflation has been easing since its summer 2022 peak. But that progress? It’s recently slowed.
At the same time, growth is easing: consumer spending is cooling and sentiment shows concern. It’s not stagflation. Not yet anyways. But the combination of stubborn inflation and waning activity echoes a pattern the Federal Reserve avoids naming.
The problem is, the Fed needs inflation to be lower, but the economy is losing momentum at the same time.
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This Week’s Briefing
Inflation is no longer falling: The latest available data from the US Department of Commerce is as of August 2025. Inflation, according to the Personal Consumption Expenditure Price (PCE) Index, was up 2.7% year-over-year. This means that price growth in August was at its highest rate in six months.
This matters because the reading is the Fed’s preferred inflation index. And, right now, that index shows inflation is still well above the central bank’s long-term 2% target.
We are no longer progressing towards a more sustainable price growth level either. After falling in the spring, inflation readings have moved sideways, and in some cases, up.
The market expects fewer interest rate cuts: Based on sticky inflation, the CME FedWatch Tool shows expectations of roughly another 0.75% of easing before the end of 2026. This would bring interest rates down to a target range of 3.00% to 3.25%. Currently, they sit at a range of 3.75% to 4.00%.
Growth indicators are softening: According to the National Retail Federation’s President and CEO, Matthew Shay, “recent economic data has been mixed.” And, while the final quarter of the year isn’t over yet, early data points to cooling activity.
Retail spending, according to the NRF, “remains solid,” but it’s also on the back of a soft patch, which showed deceleration beneath the headlines. Sales grew by 5% year-over-year in October, slowing from 5.42% yoy in September.
GDP trackers also reflect a downturn in expectations. Real-time forecasting models, like the Federal Reserve Bank of Atlanta’s GDPNow forecast, have revised their early-quarter predictions lower. Expectations are currently for 2025’s third quarter Gross Domestic Product (GDP) growth to be at a seasonally adjusted annual rate of 3.9%. Just a couple weeks ago, expectations were for a GDP growth rate of over 4%.
Consumer sentiment remains fragile: The University of Michigan’s Surveys of Consumers sentiment suggests consumer confidence is slipping from earlier in the year. Now, the survey found “inflation and high prices remain at the forefront of consumers’ minds.” In October, 45% of those surveyed said elevated prices have already eaten into their finances.
Stagflation concerns: Economists call the combination of slower growth and sticky inflation, stagflation. And it’s exactly the setup the Fed hopes to avoid.
But the central bank hasn’t used the word to describe today’s environment. At least not explicitly. That’s because the term carries heavy market implications. Even hinting at it risks tightening financial conditions overnight. That being said, the mix of softer demand and stubborn prices is becoming harder to dismiss. Even for the central bank.
Takeaway
The economy isn’t in stagflation. But the ingredients are lining up in a way the Fed doesn’t want to acknowledge: Inflation is no longer falling quickly, and economic growth is clearly losing momentum.
For policymakers, keeping rates too high risks a sharper slowdown next year. But cutting too soon could mean locking in above-target inflation levels. It’s a tension that the markets are increasingly aware of.
For investors, the risk isn’t a recession or sticky inflation. Instead, it’s a bit of both at the same time.
— Lauren Brown
Editor, American Ledger