Despite there only being a handful of economic data releases this week, each was influential to the economic outlook. This included the preliminary benchmark revision for employment, as well as the consumer and producer inflation reports for August. While the data was somewhat concerning, financial markets largely took it in-stride as expectations for next week’s Federal Reserve decision remained in-tact. The S&P 500 rose 1.6% on the week, with U.S. Treasury yields seeing little change as of the time of writing.

The preliminary revision to non-farm payrolls released on Tuesday will not be incorporated into the official data until the January 2026 release, but the snapshot it provided was concerning. Estimates of employment for the year through to March 2025 were revised lower by 911k jobs, which would be the largest revision since 2009 (Chart 1). This comes on the heels of last week’s employment report for August, which showed only 22k jobs added during the month and the unemployment rate rising to 4.3%. The emerging shift away from full employment in the economy is likely to be a top priority during Federal Reserve deliberations at next week’s meeting.

However, they will also have to assess the emerging risks to the other side of their dual mandate related to price stability, with the data we received this week on inflation also raising concerns. Those with dovish predispositions may point to the surprise decline in the producer price index (PPI) in August as evidence that price pressures are under control. However, the rolling 12-month volatility of the PPI final demand index excluding food & energy has hit its highest level since mid-2022, likely reflecting the impact that constant trade policy changes have had on firm pricing decisions. Single-month changes in the PPI therefore need to be taken with a grain of salt and illustrate the challenges the Fed faces in assessing price developments in 2025.

On the consumer inflation front, we saw further upward pressure on goods prices in August, while services inflation also remained elevated. With the three-month annualized percent change in core CPI accelerating to 3.6% in August (Chart 2), the Federal Reserve’s response function would typically be to consider raising interest rates in such an environment, all else equal. However, given the temporary nature of tariff-induced inflation and the flagging labor market, the full balance of risks will need to be taken into consideration. Amid this backdrop, in conjunction with the sustained stability in consumer inflation expectations, we expect the Fed to implement its first 25 basis point cut of the year next week.

Further interest rate reductions are expected to be implemented gradually through the end of the year, to provide support to the economy without fanning the flames of inflation anew. This is expected to be a delicate maneuver by the Federal Reserve, and one that will be sensitive to the balance of incoming economic data.