September 2025 — Stagflation Signals Strengthen

September continues the concerning trend we started seeing in August. Unemployment rose by 0.1%, while headline inflation also increased — the second consecutive month where both indicators moved up together. This pattern reinforces the warning signs of early stagflation, a situation that is notoriously difficult for policymakers to address.

Interestingly, core inflation fell even as headline inflation rose. This suggests that underlying demand pressures may be easing, while price increases are driven more by supply-side factors, such as tariffs. Essentially, demand is softening while costs from imports and commodities continue to push up prices — a combination that heightens the risk of stagflation.

Consumer sentiment and expectations reflect this unease. One-year-ahead inflation expectations nudged up 0.2% to 3.4%, and the Consumer Confidence Index fell to 55.1%. Together, these signals indicate that households are growing more uncertain, mirroring the macroeconomic stress seen in unemployment and inflation.

The Federal Reserve cut rates in September, though we won’t see the effects immediately. This move could signal a focus on supporting employment in the near term, but the challenge remains: can monetary policy effectively boost confidence and spending without exacerbating tariff-driven inflation? Given that consumer uncertainty is already rising, the effectiveness of the rate cut may be limited, at least initially.

Overall, September confirms that the economy is entering a more delicate phase. Early signs of stagflation, rising unemployment, and continued tariff-driven price pressures, combined with falling confidence, suggest that careful monitoring and strategic policy will be essential in the months ahead.