Stephen Miller
The financial commentariat seem unsure on US inflation. I think that is understandable. For months now markets have braced for an acceleration of inflation as a consequence of President Trump’s tariff agenda.
The data, however, at least in the aggregate, has not really reflected the widely held market fears on inflation.
I say in the aggregate because there are elements of this week’s June consumer price index (CPI) that are indicative of price pressures for goods that are subject to tariffs such as household appliances, furnishings and apparel. However, there were significant offsets such as airfares and accommodation reflecting reduced international tourist flows and a more cautious US consumer discretionary spend. Used car prices also registered a sharp decline perhaps reflecting sharp price reductions by Japanese car exporters to the US.
Last night’s producer price index also surprised on the downside.
Essentially, the tentative take-out is that “beneath the surface” there are indications of a stirring in US inflation but at this stage the inflation impulse from tariffs is a little short of what had been expected (including by this writer).
Where does that leave us? Are the potential offsets to the tariff impact on inflation sufficient for the Federal Reserve (Fed) to cut the policy rate when it meets on 29-30 July?
I think the answer is “no”.
But I think it is a finer judgement than markets are implying (assigning a circa two to three per cent probability of a July rate cut).
Measures of the “inflation pulse” indicate that inflation has come down through this year.
The 3-month annualised core measure of consumer price inflation was 2.4 per cent in June down from 3.0 per cent in March. The 3-month annualised Cleveland Fed trimmed-mean measure was 3.0 per cent in June from 3.7 per cent in March, while the median measure was 3.6 per cent in June from 3.9 per cent in March.
That is all well and good, but all of those measures showed some acceleration in the month of June and while ever some of those measures have a “3” in front of them and all remain north of the Fed target of 2 per cent, a cut is unlikely even if not implausible.
The Fed’s preferred measure – the core private consumption expenditure (PCE) index – is not released until 31 July, the day after the conclusion of the Fed meeting.
The May read showed a 3-month annualised increase of just 1.7 per cent. Against that most analysts see an increase in the core PCE index of around 0.3 per cent which would take the 3-month annualised increase for June to around 2.5 per cent. In annual terms that would be around 2.7-2.8 per cent.
Were the Fed to have such a number in front of them at the July meeting that probably makes a July rate cut a bridge too far – but only a little too far.
Waiting for September!
UK inflation: known stickiness
Last night’s June UK CPI figures have cast some (smallish) doubt on what was a widely held expectation that the Bank of England (BoE) would cut the policy rate from the current 4.25 per cent when it next meets on 7 August.
Headline CPI inflation rose unexpectedly to 3.6 per cent in June from 3.4 per cent in May, the highest rate of increase since January 2024. The arguably more important core measure rose to 3.7 per cent from 3.5 per cent in May.
More worryingly, services inflation – which has garnered special attention from the BoE – was unchanged at a still elevated 4.7 per cent.
This compares with a BoE target rate of inflation of two per cent.
The inflation numbers follow continued high wage numbers. The June wage numbers are released this evening and are expected to show wage increases of the order of five per cent which are likely to keep services inflation elevated.
The inflation proclivities of the UK economy imply that the BoE has a difficult balancing task and the prospect of an extended period of inflation, in excess of the two per cent target, may see some renewed upward pressure on gilt yields.
Despite disappointing inflation numbers. Markets still generally expect the BoE to cut when it meets on 7 August.
Australian inflation: what is known?
As I have previously commented, the Reserve Bank of Australia (RBA) surprised with its hold in July.
Again, that may have had something to do with the lack of any evidence in the hard data around any substantial activity blowback from US trade policy.
However, I think that the inflation picture confronting the RBA might be a little less challenging than that confronting the Fed and certainly the BoE.
Australia’s eschewal of retaliatory measures against US tariff impositions will mitigate any inflation fallout.
And while abject productivity growth and attendant elevated unit labour cost growth argue for some caution on a too optimistic inflation outcome there are other elements that suggest that the near-term inflation outlook may be sufficiently satisfactory to allow an August policy rate reduction.
For one thing, the monthly CPI inflation indicators have been benign.
For another, the June NAB Business Survey revealed the likelihood of further disinflation (in line with RBA forecasts). (However, it indicated somewhat elevated labour and other business costs suggesting that Australian businesses are facing continuing margin pressure.)
It is the case that RBA forecasts now have underlying inflation around the midpoint of the two to three per cent range out to mid-2027.
In her press conference following the July Monetary Policy Board (MPB) decision, Governor Bullock seemed to indicate that the decision to hold was more about timing rather than direction.
At the next MPB meeting in August, the MPB will have the benefit of more information in assessing the fallout on global trade and activity from the US Administration’s tariff policy. I expect the Administration’s approach will result in softer global growth.
More importantly, the MPB will have the June quarter consumer price index (CPI) read. If that is around the RBA forecast of 2.6 per cent – which I think it will be – then the MPB will cut the policy rate at that meeting.
Coming up: June labour force
Today’s June labour force data will give a more up-to-date picture of the labour market. Markets have pencilled in a circa 20k increase in employment and an unchanged unemployment rate at 4.1 per cent. That would be a strong outcome given still tepid activity growth. Anything close to the market expectation is unlikely to shift the dial for the RBA Board away from a “cautious and predictable” approach that I expect would accommodate a policy rate cut in August so long as June quarter trimmed-mean inflation is close to the RBA forecast of 2.6 per cent.
By Stephen Miller, investment strategist
