Weekly Comment: Mixed US inflation data leaves Fed in tight spot

Market overview – Richard Carter, Head of Fixed Interest Research

Two leading inflation indicators gave mixed messages last week on US price pressures, as the consumer price index (CPI) held steady while the producer price index (PPI) rose at its fastest pace in three years. The difference can be explained by the initial impact of higher US tariffs seemingly falling far harder on corporates than individuals.

The consumer price index is the more widely followed of these two inflation gauges, and a 2.7% annual increase for July was in line with the previous month and below the 2.8% consensus forecast. There was a faster than expected increase in the core figure, coming in at 3.1% versus 3.0% consensus forecast, but overall, the data was well received by financial markets, taken as a sign that inflation remains under control and not prohibitive to a Federal Reserve (Fed) rate cut at its next policy meeting. Although the headline CPI data has risen from 2.3% in April, it is still at a palatable level for rate setters and has, thus far, shown little indication that it is rapidly accelerating in response to trade tariffs.

The latest producer price index did provide some cause for concern though. Coming two days after the CPI had alleviated fears, a 0.9% monthly increase for July marked a step change from prior readings with the two most recent coming in at 0.0% and -0.1%. Some increase was expected, but the final figure was well above the 0.2% consensus forecast. This is the sort of dramatic rise that some economists had feared would occur due to tariffs, but it is worth pointing out that this remains only one data point and we need to see further information before we can say with high conviction that it is a new trend. The stockpiling of goods before the tariff announcements in early April means that there is some lag to the inflationary impact and the next few months will provide a far better ideas as to whether inflation will once more threaten to get out of control.

In the meantime, the Fed face a tricky situation with a sharp slowdown in the latest monthly jobs numbers suggesting the economy may not be holding up as well as previously thought. That would suggest lowering rates to support the economy at the same time that possible concerns about rising inflation would call for rates to be maintained, or even increased, for fear that lower interest rates could stoke inflationary pressures.

Fed chair Jay Powell has the unenviable task of navigating these opposing forces while being under heavy political pressure from US President Donald Trump. This week Powell’s speech at the Jackson Hole symposium is seen as potentially market moving, with any endorsement of a September rate cut viewed as all but confirming the move given derivatives markets are pricing a roughly 75% chance. Should Powell push back on this then there could be some disappointment.

Weekly economic announcements:

The MSCI All Country World Index added 1.3% last week (14.7% YTD).

United States:

US stocks slightly underperformed on the week, rising 1.0% (10.5% YTD). Gains were supported by the inflation data and rising expectations of a September rate cut from the Fed. Small-cap stocks outperformed large caps by the widest margin since April, with the former rising 3.1% (3.4% YTD). Tech stocks underperformed, adding 0.8% (12.4% YTD), although they did make a new record high.

United Kingdom:

UK large caps rose 0.8% last week (14.9% YTD) but mid-caps lost ground and fell 0.7% (+8.1% YTD). The pound rose against the US dollar to US$1.36. UK GDP figures beat forecast, with a faster pace of expansion in June contributing to a 0.3% increase for the second quarter. This marked a slowdown on the 0.7% rise in the first quarter but was above the Bank of England’s 0.1% forecast.

The latest labour market figures painted a picture of some continuing weakness, with a sixth consecutive fall in payrolled employees. The decline in July was 8k, while June’s drop was revised down by 15k to 41k. The 4.7% unemployment rate was unchanged and remains at the highest level since 2021. Wage growth, including bonuses, also slowed, rising 4.6% annually for the three months through June.

The 10-year gilt yield rose 10 basis points (0.1%) on the week, to end at 4.7%.

Europe ex UK:

Continental European stocks slightly outperformed global peers, with the MSCI Europe ex UK rising 1.4% on the week (11.6% YTD). Hopes of a possible end to the Russia-Ukraine conflict were a welcome development. German stocks added 0.8% (22.4% YTD), French benchmarks rose 2.3% (10.5% YTD) and Italian indices rallied 2.5% (29.5% YTD). The single currency ended the week at US$1.17, up from US$1.16.

Quilter Cheviot Approver 19 August 2025

To listen to all the past Weekly Comment podcasts click here or subscribe via the apps below: