Market Update – August 18th, 2025

Financial Markets

The S&P 500 and Nasdaq hit record highs last week before sliding in the latter half of the week, as strong retail sales were offset by weak consumer sentiment and higher inflation. For the week ending August 15th, the S&P 500 rose 0.94%, the Nasdaq gained 0.81%, and the Dow climbed 1.74% on a jump in UnitedHealth Group shares after Berkshire Hathaway announced a large stake in the healthcare giant.

Market News

July CPI. July’s Consumer Price Index report showed inflation came in slightly better than expected, but underlying price pressures remain. Headline CPI held steady at 2.7% year-over-year, while core CPI, which excludes food and energy, rose to 3.1%. On a month-over-month basis, prices rose 0.2% for headline CPI and 0.3% for core CPI.

By category, inflation trends were mixed. Grocery prices fell 0.1% in July but were up 2.2% from a year ago. Energy prices declined 1.6% year over year, driven largely by lower gasoline costs, helping contain the headline CPI figure. New vehicle prices increased 0.4% year-over-year, while used vehicles surged 4.8%, an industry that has been a target of higher tariffs.

Apparel prices, a tariff-sensitive category given the high proportion of U.S. apparel that is imported, declined 0.2% year-over-year, potentially reflecting softer consumer demand and retailers frontloading inventory ahead of tariff hikes. Shelter costs remained elevated, rising 3.7% from a year earlier, continuing to be a major contributor to core inflation. While the moderation in headline inflation is encouraging, the uptick in core reflects persistent price pressures, some of which may be tied to the impact of higher tariffs.

Source: Bureau of Labor Statistics

July PPI. In contrast to the July Consumer Price Index, which came in largely in line with expectations, producer prices were much hotter than anticipated, a notable cautionary signal. Headline PPI rose 3.3% year-over-year, the highest annual rate since February, while core PPI increased 2.8%. On a month-over-month basis, producer prices surged 0.9%, with core prices up 0.6%. This may represent one of the first meaningful signs of tariff-related inflation, as higher import costs typically hit producers before filtering through to consumers.

Price increases were broad-based across categories, with goods prices rising 0.7% in July, while services jumped 1.1% in the month. Food prices increased 1.4% in the month, energy rose 0.9%, and trade service costs surged 2%. Transportation and warehousing services also saw a notable 1.0% increase. The hotter PPI print is a concerning indicator for the months ahead, as businesses may pass these higher costs on to consumers, contributing to future CPI increases, or absorb them, which could compress profit margins. Either outcome poses potential headwinds to the US economy.

Source: Bureau of Labor Statistics

Retail Sales. Retail sales posted solid growth in July, rising 0.5% month-over-month and 3.9% year-over-year. The annual pace of growth exceeded inflation, indicating real, inflation-adjusted spending gains. Non-store retail sales, which include online shopping, rose 8% from a year earlier, extending a trend of robust e-commerce growth.

Food service spending rose 5.6% year-over-year, a strong pace for the category and a sign that discretionary spending on dining out appears healthy. Overall, the data suggest consumers remain willing to spend despite a backdrop of mixed economic signals.

Source: US Census Bureau

Consumer Sentiment. Adding to economic complexity, consumer sentiment fell more sharply than expected in August, declining 5% from July and 13.7% from a year earlier. The deterioration was driven largely by growing concerns over inflation, with year-ahead inflation expectations rising from 4.5% in July to 4.9% in August. This increase was broad-based, spanning all demographic groups.

Assessments of current personal finances also weakened modestly, reflecting heightened worries about purchasing power. However, consumers are no longer anticipating the worst-case economic scenarios feared in April when reciprocal tariffs were first announced, yet sentiment remains well below pre-pandemic levels and has been trending lower since early 2024, signaling persistent caution among households.

Source: The University of Michigan

Initial Claims. Initial jobless claims continue to point to labor market stability, with filings trending lower since late May. For the week ending August 9th, claims came in at 224,000, bringing the four-week moving average up slightly to 221,750. While hiring has moderated, both the unemployment rate and unemployment claims remain at levels consistent with a healthy labor market.

Source: Department of Labor

Summary

U.S. equities reached record highs early last week before pulling back, reflecting mixed economic signals. Retail sales rose 0.5% for the month of July and 3.9% year-over-year, while consumer sentiment weakened and inflation remained elevated. July CPI held at 2.7% with core at 3.1%, PPI jumped 3.3% year-over-year, and initial jobless claims stayed low, highlighting persistent price pressures alongside a stable labor market.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

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