August 2025 — Early Signs of Concern

August starts to show more concerning trends. Unemployment rose by 0.1% to 4.3%, the highest level this year so far, which hints at growing slack in the labor market. At the same time, headline inflation increased by 0.2% to 2.9%, while core inflation remained steady. This combination — rising unemployment and rising inflation — is unusual this year and points to the influence of supply-side shocks, particularly the ongoing effects of tariffs. For the first time, the data gives an early warning of stagflation, with price pressures rising even as the labor market begins to soften.

Household sentiment mirrors these economic signals. One-year-ahead inflation expectations nudged up by 0.1%, and the Consumer Confidence Index fell to 58.2%. Together, these changes suggest that consumers are growing more uncertain, undoing some of the confidence gains we saw in June and July. People are starting to notice that the economy, while still relatively strong by some measures, is not as stable as it appeared earlier this year.

Overall, August paints a cautiously worrying picture. The economy is showing early signs of stress from tariff-driven inflation and weakening employment, while consumers are becoming more hesitant. Policymakers face a tricky balance: fighting inflation without exacerbating labor-market weaknesses is never easy, especially in the presence of supply shocks. For now, the signals suggest careful monitoring is needed, and any policy moves should weigh both inflationary pressures and the health of the labor market. Consumers seem to understand this as well — confidence is falling, reflecting a growing awareness that the economy may be entering a more challenging phase.