Jobs Growth Stalls, Inflation Looms: Is Stagflation Knocking on Wall Street’s Door?

• The August employment report sparked big swings in stocks and intense bond buying

• PPI and CPI take center stage this Wednesday and Thursday, along with a trio of inflation survey reads

• We offer fresh takes and key portfolio updates during this sometimes-tumultuous part of the calendar

Last Friday’s August jobs report confirmed that the labor market has just about ground to a halt. What we described as a “good, not great” employment situation earlier this year has transitioned into a stall-speed hiring environment. 

The economy isn’t experiencing mass layoffs or industry-specific turmoil, but the 22,000-payrolls increase was far below what economists had expected. What’s more, negative revisions to June jobs sent that month’s headline figure negative, marking the first sub-zero employment change since December 2020.

Just 22,000 Jobs Added in August, June Payrolls Revised Negative

Source: St. Louis Federal Reserve

A saving grace was a bounce back in the labor market’s size, as more people entered the workforce (often viewed as a healthy development). Along with that expansion comes a higher unemployment rate: Both the widely reported U-3 and the U-6 “underemployment” rates rose to their highest levels since October 2021. 

Within the August nonfarm payrolls establishment survey, average hourly earnings fell to 3.7% on a year-over-year basis, potentially putting downward pressure on the currently elevated inflation rate.

Average Hourly Earnings YoY Dips to 3.69%

Source: St. Louis Federal Reserve

Last week, we called out the importance of the August jobs report. All of the key indicators, including the Purchasing Managers’ Index (PMI) Employment readings, Job Openings and Labor Turnover Survey (JOLTS), ADP Private Payrolls, Challenger Job Cuts, and weekly jobless claims data, reinforced the reality that the labor market is no longer putting much upward pressure on inflation. 

But there’s a curveball: The exodus of millions of illegal workers and fewer new entrants into the labor market may keep wage growth stubbornly elevated.

Challenger Jobs Cuts Rise for a Second Straight Month

Source: Challenger, Gray & Christmas

It’s fitting that Inflation Week on Wall Street comes immediately after the deluge of jobs data. This week’s price updates (the Producer Price Index (PPI) on Wednesday morning and Consumer Price Index (CPI) on Thursday morning) will likely firm up the Federal Reserve’s September 17 interest rate decision. 

The Federal Open Market Committee (FOMC) is hinged to its dual mandate to promote maximum employment and price stability. Both pieces are in jeopardy today, leading bears to push the “stagflation” narrative (a period of low growth with high inflation). The August jobs report confirmed some “stag,” and we’ll see if this week’s inflation data confirms the “flation.” 

Eye on Inflation Prints: PPI, CPI & Tariff Pressures

This week is a bit different than usual. Often, the CPI report is released a day before PPI. Instead, wholesale prices kick things off at 8:30 a.m. ET on Wednesday. Consumer prices via the CPI hit 24 hours later. For investors, it’s actually appropriate. Let’s explain why.

PPI’s components map more directly to the Personal Consumption Expenditure (PCE) Price Index, which is the Fed’s preferred inflation gauge. Badly lagging housing price data are less of a problem with PPI compared to CPI, while tariff pressures impact PPI before CPI. 

Thus, in the current macro environment, PPI is a leading indicator of sorts to CPI, and potentially the PCE Price Index. So, it’s arguably more important than CPI at the moment. PPI is now without its problems—items like Portfolio Management and Auto Insurance routinely sway the final reading disproportionally. 

Will August PPI Follow July’s Hot 0.94% Climb?

Source: St. Louis Federal Reserve

Last time, the July PPI came in significantly above Wall Street’s expectations, driven by the aforementioned categories, as well as unusually elevated services margins. Margins is a rarely parsed piece of the wholesale price report, but it caught much fanfare a month ago. Margin PPI tracks the added value from the wholesaler to the retailer, and that’s precisely where many of the tariffs hit. 

According to Goldman Sachs, preliminary estimates peg more than half of the import duties on US businesses (through June), with consumers footing just 22% of the tariff bill. Foreign exporters have absorbed a mere 14% of the levies, per the analysis. Goldman expects that US households will be increasingly pinched as we approach year-end.

Goldman Sachs: US Businesses Took Most of the Tariff Punch Through June

Source: Goldman Sachs

PPI’s 0.9% July jump was a multi-standard-deviation event, in terms of the difference between the consensus target and actual outcome. Wholesaler margins and PPI for Portfolio Management drove the beat. It called into question whether Fed rate cuts were the right monetary policy move amid so much macro price uncertainty. 

As it stands, PPI runs 3.3% on a year-over-year basis, with the core rate (excluding food, energy, and trade) higher by 2.8% versus 12 months ago. In this instance, given the tariff backdrop, PPI could very well be more impactful than CPI.

CPI is widely reported beyond just the financial media’s confines. PPI is not often telegraphed on broader news feeds, nor will it generate a real-time alert on your phone (unless you are a macro nerd, like everyone on the Allio team). But CPI gets everyone’s attention. 

The August numbers cross the wires this Thursday before the bell, and expectations call for a 0.3% rise in both the headline and core rates (the latter strips out the volatile food and energy components). That would bring the annual figures to 2.9% and 3.1%, respectively. Recall that the Fed’s inflation goal is 2% annual headline PCE, so we are still many months (even quarters) away from being at target. 

This Week’s Major Macro Data Releases

Source: Trading Economics

The problem with CPI centers around how it calculates shelter costs. Housing and rent prices are inefficiently captured by the Bureau of Labor Statistics’ (BLS) methodology. The government notoriously surveys homeowners for their estimates on how much their residence has appreciated (or dropped, in some cases). 

They also used badly lagged rent price data. The result is a muddied view of the real estate situation, and since shelter costs account for a bit more than one-third of CPI, it can distort the true view of aggregate price trends economywide. That’s just something to keep in mind ahead of Thursday morning’s data release.

PPI & CPI: The Market Impact

So, will we get the “flation” in the “stagflation” narrative this week? Pundits can figure that out among themselves. The reality is that the Fed is likely to resume its rate-cutting cycle, almost regardless of PPI and CPI this week. The FOMC entered its so-called “blackout window,” a quiet period that begins on the second Saturday before a meeting and ends at 11:59 p.m. ET on the Thursday after the meeting. 

Here’s some inside baseball: It’s sort of an unwritten rule that the voting members on the Fed don’t look to surprise markets by unexpectedly changing the rate, or holding it when bond traders have priced in a quarter-point adjustment. 

As of last Friday (and through today), markets price in at least one 0.25% cut to the target Effective Fed Funds Rate (EFFR). While nothing is a sure bet, it’s very close to a lock that a quarter-point ease is on the way. But could it be more? PPI and CPI could tip the scales toward a jumbo 50-basis-point cut. We’ll break it down into three scenarios regarding August inflation data:

1. In-line: A quarter-point cut is the probable outcome, with dissenters potentially in both directions.

2. Hot: A reluctant quarter-point cut with the inflation hawks making their voices heard (Hammack, Bostic, Musalem, and Schmid).

3. Cold: The possibility of a 50-basis-point ease, led by the doves: Governor Chris Waller, Vice Chair of Supervision Michelle Bowman, and Stephen Miran (if he is confirmed by the Senate before the September 16-17 Fed gathering).

11% Chance of a Jumbo September Rate Cut

Source: CME FedWatch Tool

The S&P 500 would cheer soft PPI and CPI data, but it’s not cut-and-dried as to what low inflation prints imply about the US economy. 

You see, if we are entering a period of softer growth, cooling goods and services price trends should be anticipated. Given the stagnant labor market, slowing growth may outweigh the tariffs’ impact. If that’s the case, “cold” wholesale and consumer price data could ultimately underscore rising recession risks. That's the longer-term view (looking out a few quarters). 

In the here and now, below-consensus PPI and CPI put a jumbo rate cut on the table, and that would potentially be music to the bulls’ ears. Based on recent price action, areas like US small caps, homebuilder stocks, and shares of biotech companies might continue to outperform. Each of those three niches closed last Friday at fresh 2025 highs. Hopes are clearly pinned to imminent rate cuts; thus, a half-point slash to the policy rate could act as rocket fuel.

The Rate-Cut Trade: Small Caps, Hombuilders, Biotechs Hit 2025 Highs

Source: Stockcharts.com

“Stagflation” can’t be ruled out, though. Stagflation is a macro condition marked by high inflation, slow or stagnant economic growth, and high unemployment. The bears have touted stagflation for years now, but we’ve yet to see it truly harm equities. 

To be clear, 2022 was a full-fledged bear market in the stock and bond markets, driven by reckless fiscal and monetary policy coming out of the COVID-19 pandemic. For the past three years, however, above-target inflation hasn’t been a major headwind. And in 2025, slowing GDP growth with weakening employment trends have done little to stop the bulls: the S&P 500 has returned 11.2% year-to-date, the tariff-tantrum of March and April notwithstanding.

S&P 500 Up More than 11% in 2025

Source: Stockcharts.com

At the same time, investors must acknowledge that rate cuts have recently been the motivator keeping the uptrend intact. Yes, AI-fueled earnings keep powering the Magnificent Seven stocks and big-cap tech. Still, the broader summer rally has increasingly been centered on a more accommodative Fed—hot PPI and CPI data this week have the potential to upend the narrative. 

Is it a make-or-break week? The media may hype it to that level, but our team views the Wednesday and Thursday data as important clues rather than a be-all and end-all event.

Drama at the Fed

We noted the chance of dissenting votes in both directions at the September 16-17 Fed meeting earlier. It’s a rare occasion when even two ballots are cast in an opposing direction of the broader Committee, and several dissenters is a conceivable outcome this go-round. 

BofA: Two-Way Dissents Possible

Source: BofA Global Research

Consider this: Stephen Miran, poised to replace former Fed governor Adriana Kugler, was grilled before the Senate Banking Committee last week. Senator Elizabeth Warren (D-MA) chastised the former chair of the Council of Economic Advisers for his loyalty to President Trump. Warren’s colleagues on the left verbally beat him up further. That’s all theater. Miran is expected to be confirmed by the Senate, potentially in time for the Harvard-schooled economist to cast a vote on interest rates next Wednesday.

As Miran makes his way through the Senate confirmation hearing, the president may soon appoint a second Fed member. Dr. Lisa Cook remains in the hot seat as she faces allegations of mortgage fraud, though no formal charges have been filed. Pressure grows on the Fed governor to step down, both from President Trump and Bill Pulte, director of the Federal Housing Finance Agency (FHFA). We won’t get into the details today, but if Cook drops out or is removed from the FOMC, another Trump loyalist could take her seat.

Between the Miran and Cook sagas, the Fed’s longstanding perceived independence has come under attack. It’s important to recognize that the Federal Reserve, also known as “the creature from Jekyll Island,” was created by Congress. Furthermore, the FOMC’s voting members are not always down the political middle. 

For instance, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, was a reliable dove on the Committee during the Biden years. Now, despite the Fed Funds futures market firmly moored to a rate cut this month, the former senior economic advisor to President Obama has come out “undecided” on a September rate cut. Is it a political stunt? Perhaps not overtly, but Goolsbee has certainly bucked his historical tendency to side with doves.

Goolsbee Still Unsure on Rate Cuts

Source: Google

Businesses and Consumers Have Their Say

Steering back to the data, PPI and CPI are not the only inflation reads this week. The NFIB (National Federation of Independent Business) Small Business Optimism Index, a composite of 10 factors based on responses from 620 NFIB members, hit the tape before sunrise on Tuesday. The NFIB polls on employment and investment plans, expectations on the US economy, and inflation. The survey leans naturally republican, so it has painted a rosier view of growth and inflation. 

Then on Friday, consumers’ vibes come across via the University of Michigan Surveys of Consumers. Its consumer sentiment report is now infamous for poor methodology and outright tainted results. Simply put, markets have little regard for “UMich” these days. In the final August update, democrats polled believed inflation would average 4.7% over the next five years, whereas republicans saw just a 2.4% yearly consumer price rise. For what it's worth, the current 5-year breakeven inflation rate is 2.42%.

Democrat Inflation Expectations High at 4.7%, Republicans Closer to the Market at 2.4%

Source: Bianco Research

At Allio, we prefer a different survey: the monthly New York Federal Reserve Survey of Consumer Expectations. It usually prints at 11 a.m. ET on the Monday before PPI and CPI. Much to the financial media’s chagrin, it is rare to find bombastic macro nuggets to sift out from the dataset. 

Less politically charged, current NY Fed consumer inflation expectations are somewhat close to breakeven rates determined from the TIPS market (Treasury Inflation-Protected Securities) and swap derivative instruments.

US Inflation Swap Rates Coming off the Boil

Source: Augur Infinity

The Immovable Object and the Irresistible Force: The US Consumer

Inflation may linger as a macro worry so long as people keep spending. Though the unemployment rate has inched up to a year-to-date high of 4.32%, it’s still low by historical standards. What’s more, workers' wages grow above the prevailing inflation rate. That’s a healthy combination for overall spending. 

Indeed, retail executives generally indicated a solid back-to-school shopping season from mid-July through August (it’s actually the second-biggest spending event of the year), and the weekly Johnson Redbook retail sales data are not far from cycle highs.

Redbook Retail Sales +6.5% YoY

Source: Augur Infinity

The Goldilocks macro outcome relies on a single theme: gradual shifts. 

For stocks to keep working, tariffs cannot slam households and small business owners all at once. Additionally, extensive job cuts must be avoided; a slow rise in the unemployment rate to, say, 4.50% should not be too damaging. In fact, it may allow the Fed to slash rates over the next 12 months, potentially laying the groundwork for a marked 2026 growth renaissance.

Based on our analysis, we are adjusting our portfolio allocations. However, it's important to note that investing involves risk and past performance is not indicative of future results. Throughout this year, we’ve anticipated a weaker GDP pace amidst so many macro changes happening all at once following the Biden economy. That outlook appears to be falling into place. Couple lower interest rates next year with the economy-boosting provisions within the One Big, Beautiful Bill Act (OBBBA), and There are indications that could suggest potential economic growth, but it's important to remember that economic conditions can change rapidly and unpredictably.

Volatility Ahead?

An innocuous and elegant transition could be hard to finesse. Our team acknowledges that seasonal risks are at play in the short term. The second half of September has historically been a challenging stretch for the bulls. Let’s game it out.

Spooky September Trends

Source: Citadel Securities

Suppose we get tame inflation data this week; it’s reasonable to assert stocks rally into the Fed meeting. But then maybe Chair Powell issues a “hawkish cut,” holding fast to the notion that tariffs could lead to protracted inflationary pressures. His afternoon press conference after the Fed rate announcement may be pivotal. 

Following the seasonal script, stocks could drop through quarter-end. The good news is that the most bullish period typically occurs from mid-October to early January of the new year. 

Allio’s portfolio team detailed key changes in our September Commentary. Aligning with a more cautious approach, we trimmed equity exposure in favor of fixed income. Within the bond market, duration was extended to capitalize on lower, longer-term interest rates expected in the weeks ahead. Stay tuned for further updates.

Allio’s September Commentary

This is no time to stand pat. Relying on a static allocation could prove perilous as financial markets and the economy reshuffle. The 2-year Treasury yield has already sunk to a three-year low, and gold notched a new all-time high last week. Crypto prices have wavered, while rate-sensitive slices of the stock market are soaring. Allio’s ALTITUDE AI-powered portfolios quickly adapt to price action, and volatility could be on tap across markets.

The Bottom Line

This week is all about August inflation updates. PPI and CPI (along with the NY Fed’s survey, UMich, and the NFIB) may dictate the Fed’s next move. Markets expect a rate cut—maybe two. Small caps, homebuilders, and biotech have worked in the stock market, just as gold logs new records. Short-term Treasury yields and the dollar press lower, while long-term global sovereign bonds come under pressure. Oh, by the way, a government shutdown could be taking shape at the end of September.

Macro volatility is high, and investors must have a plan. Last Friday’s jobs report was just the start of a string of key price-action catalysts in the weeks ahead.