ETFs to Gain as Inflation Edges Higher in August

The U.S. annual inflation rate accelerated to 2.9% in August 2025, with monthly CPI rising 0.4% above forecasts due to increased energy and food costs, while core inflation held steady at 3.1%. This hotter inflation print has influenced Federal Reserve expectations, with markets now pricing a 92.5% probability of a 25-basis point rate cut in September, reducing the likelihood of a more aggressive reduction. Despite a recent rise in jobless claims, robust Q2 GDP growth of 3.3% and positive Q3 S&P 500 earnings forecasts indicate underlying economic resilience, creating a nuanced outlook for monetary policy.

Analysis

The U.S. macroeconomic landscape presents a complex picture for investors, characterized by conflicting data points that temper expectations for aggressive monetary easing. The annual inflation rate for August 2025 accelerated to a year-to-date high of 2.9%, with the monthly CPI print of 0.4% exceeding forecasts, driven by resurgent energy and food costs. However, core inflation held steady at 3.1%, suggesting underlying price pressures are contained for now. This inflationary persistence, combined with resilient economic fundamentals—including a revised Q2 GDP growth rate of 3.3% and a positive revisions trend for Q3 S&P 500 earnings (projected up 5.1% YoY)—has significantly altered Federal Reserve expectations. The market, according to the CME FedWatch Tool, has almost fully priced out a 50-basis point rate cut, now assigning a 92.5% probability to a more moderate 25-basis point reduction in September. While a recent rise in jobless claims adds a dovish element, the overall strength in growth and corporate profitability provides the Fed with less impetus for a sharp policy pivot.

Key Decisions for Investors

• Investors should re-evaluate rate-sensitive positions, as market expectations have firmly shifted from an aggressive 50-basis point rate cut to a more measured 25-basis point reduction.
• Consider maintaining or increasing exposure to large-cap blend equity strategies, such as IVV or ITOT, which are well-positioned to capitalize on the combination of solid corporate earnings, robust GDP growth, and a moderately accommodative Fed.
• Monitor upcoming inflation and labor market data with heightened vigilance, as any significant deviation could rapidly alter Fed policy expectations and introduce market volatility.