Bank of America forecasts indicate that U.S. inflation will likely remain elevated in August, with both headline and core Consumer Price Indices showing continued upward pressure. This persistence in inflation, driven by factors including tariffs and firm non-housing services, could influence the Federal Reserve's monetary policy decisions and impact various sectors of the economy.

The latest forecast from Bank of America (BofA) suggests that U.S. inflation will continue to exhibit "sticky" characteristics in August, with both headline and core Consumer Price Indices (CPI) experiencing sustained upward pressure. This outlook indicates a challenging environment for policymakers aiming to bring inflation back to target levels, with potential ramifications for financial markets.

Analysis of August Inflation Projections

Bank of America projects the year-on-year headline CPI to increase from 2.7% to 2.9% in August, which would mark its highest level since July of the previous year. Core CPI, which excludes volatile food and energy components, is expected to remain at 3.1% year-on-year. Correspondingly, core Personal Consumption Expenditures (PCE) inflation, the Federal Reserve's preferred inflation gauge, is estimated to rise to 3.0% year-on-year in August.

The drivers behind these persistent inflationary pressures are multifaceted. BofA highlights rising energy prices, continued tariff-driven goods inflation, and firm non-housing services as key contributors. Core goods prices are anticipated to have risen by 0.2% month-on-month. Non-housing services, including airfares and lodging, are expected to remain robust, reflecting a combination of mean-reversion after earlier declines and heightened summer travel activity. Non-housing core services prices advanced by 0.4% month-on-month, following a 0.5% increase in July.

The Enduring Impact of Tariffs

Tariffs are playing a notable role in the ongoing price increases. New tariffs introduced in 2025 have generated significant revenue, totaling $88 billion year-to-date through August, with $23 billion collected in August alone. The actual average effective tariff rate climbed to approximately 10-11.5% in July and August, a substantial rise from 2.4% at the start of the year.

Evidence suggests these tariffs are translating into higher goods prices for consumers. Core goods prices were 1.9% above their pre-2025 trend as of June. Specific examples include prices for video, audio, photographic, and information processing equipment, which were 5.7% higher than their pre-2025 trend. Household appliances were 3.9% higher, furniture 3.1% higher, and recreational items 3.0% higher. Estimates suggest that 61-80% of the new 2025 tariffs were passed through to consumer core goods prices in June.

Despite the concerns regarding tariffs and their potential impact on long-run profitability, the S&P 500 has demonstrated resilience, advancing nearly 10% since December 31. This suggests that these tariff-related worries are not singularly dominating market pricing at present.

Monetary Policy Implications and Market Reactions

The persistent inflationary environment poses a critical challenge for the Federal Reserve. With the 12-month PCE price index at 2.6% in July and the 12-month core PCE inflation rate at 2.9% in July, inflation remains above the Federal Reserve's 2% target. The lack of significant change in these measures over the past 12 to 18 months indicates that progress towards the Federal Open Market Committee (FOMC)'s long-run inflation goal may have stalled.

The Federal Reserve's 2025 rate-cutting path is a key focus for investors. While J.P. Morgan Research projects the federal funds rate to decline by 100 basis points to 3.25–3.5% by early 2026, the FOMC's own June 2025 projections indicate a more cautious 50-basis-point reduction, reflecting the committee's apprehension regarding inflation stickiness.

Despite this caution, market sentiment largely anticipates a rate reduction. The CME Group's FedWatch tool indicates a 90% probability of a 25-basis-point rate cut at the September FOMC meeting. Similarly, market participants are pricing in an 87% probability of such a cut at the September 16–17 meeting.

A dovish Federal Reserve typically favors growth stocks, particularly in technology and other high-growth sectors, as lower borrowing costs can enhance valuations. Rate cuts also tend to amplify returns for long-duration assets. However, should persistent inflation lead the Federal Reserve to maintain a more hawkish stance, it could result in higher bond yields and headwinds for growth-oriented equities, potentially impacting economic growth and corporate earnings across various sectors.

Looking Ahead

The trajectory of inflation and the Federal Reserve's response will be pivotal in the coming months. Investors will closely monitor upcoming economic reports, especially further inflation data, for signs of moderation or continued upward pressure. The Federal Reserve's policy decisions, particularly regarding the pace and magnitude of any future rate adjustments, will continue to be a dominant factor shaping market sentiment and asset allocation strategies.