US inflation surprises but signals unclear
Hot US inflation prints, strong yet volatile UK growth, and a near-certain Japan rate hike dominate the outlook, with markets navigating data noise, energy-driven pressures, and geopolitical risks.
Weekly highlights
Highest since May 2023
Six-month high
Highest since Dec 2022
Outperformed but underlying components are volatile
Up from 0.1% in Q4 2025
Weak
Highest in 12 years
But GDP to rise on exports
Near record lows
US: Hotter inflation prints reignite rate hike debate
There is no denying that the April inflation data came in pretty hot. Consumer price inflation accelerated another half a percentage point to 3.8% YoY, the highest read since May 2023. Much of this reflected ongoing increases in energy prices, with energy commodities now up 29.2% YoY. For comparison, the same category printed -5.2% YoY as recently as February!
However, the real surprise was the 0.6% MoM increase in services, in turn driven by an outsized 0.6% MoM surge in shelter. This lifted core price 0.4% MoM and lifted core inflation by two tenths to a six-month high of 2.8% YoY. By contrast, the other service categories (even transportation) were well-behaved.
Our more constructive view on inflation incorporates expectations of ongoing shelter disinflation, so the April update was indeed a challenge to that assessment. Nevertheless, we find the data unconvincing because it lacks corroboration in other indicators. As such, we see the hot April print more like an outlier than the start of a new trend. Why do we say this? Firstly, the magnitude of the increase is just so completely out of the recent context; even when taking into account some possible sample-related issues, the gain just seems exceedingly large.
Meanwhile, market data for rents from sources such as Zillow or Apartment List do not indicate any inflection higher in rents so far. Additionally, the rental vacancy rate continues to climb higher, and this is generally a very good leading indicator of future rent inflation. For instance, the national rental vacancy rate hit 7.3% in the first quarter, the highest since Q3 2017. Given real personal disposable income is barely rising, it seems unlikely that landlords would be able to push through significant rent increases. There is not much to do but wait for more data to gain clarity. Until then, we are tempted to dismiss this as more noise than signal.
That being said, both producer prices and import price data came in hotter than expected, largely (but not entirely) driven by energy prices. In terms of import prices, we are struck by the two large consecutive monthly increases in import prices from China, which stand in stark contrast to the behavior seen a year ago around tariff liberation day. We question how much more upside is here.
The hot inflation wave has once again pushed market expectations in a hawkish direction, with odds of a Fed hike this year now above 50%. We are not surprised to see that happen, but we believe the threshold for a hike is extremely high. There were so many apparent anomalies in this batch of inflation data that we could easily see some reversals soon, in which case market expectations could shift once again. Our confidence in our call for two rate cuts late this year has certainly diminished, but we are holding on to that call until at least the next batch of inflation updates. If the upward momentum persists, a reassessment will be in order.
UK: BoE unmoved by robust GDP surge
The latest GDP figures demonstrate exceptional strength, yet we anticipate that their impact on the Bank of England’s monetary policy will remain limited. The central bank is steadfastly focused on combating escalating inflation and addressing secondary effects, maintaining its commitment to stability amidst challenging economic conditions.
The UK delivered a robust 0.6% QoQ growth in Q1. However, we scrutinize these numbers with prudence. Since 2022, the UK economy has consistently surged in the first half of the year, only to falter in the latter months. This persistent pattern likely stems from the method of seasonal adjustment, compounded by soaring inflation and the timing of annual price hikes.
Despite these challenges, Q1 showcased resilient growth. Retail spending held firm, while the Purchasing Managers' Indices signaled robust expansion. Detailed demand metrics revealed substantial gains in household consumption (up 0.6% QoQ), contributing 0.35 percentage points to GDP growth, and business investment (up 0.7%), adding 0.08 percentage points. Nonetheless, these vital demand drivers have experienced pronounced volatility in recent quarters, underscoring the need for cautious optimism.
Looking ahead, the outlook for Q2 growth is pivotal. March’s strong performance sets a solid stage for continued expansion in Q2, ahead of a probable sharp deceleration in Q3. Real disposable income faces downward pressure, and the labor market exhibits signs of weakening. Notably, the savings ratio remains elevated, reflecting heightened precautionary sentiment among households.
Yet, intensifying conflict in Iran stands as a critical variable, exerting significant upward pressure on oil prices and shaping the broader economic outlook. While a June rate hike is not our base case, its likelihood is steadily increasing. Forthcoming data releases, which include April’s CPI and May’s flash PMIs, will be decisive. We anticipate a decline in CPI inflation for April, driven by fiscal measures and reduced energy costs. However, if CPI or PMI results surpass expectations, the Bank of England may be compelled to take bold action and raise rates.
Japan: June hike is a done deal
We now see a near-certain case for a June hike by the Bank of Japan (BoJ). Not only has the Corporate Goods Price Index moved materially higher, but even previously neutral policymakers are turning more hawkish. On the margin, we still expect two hikes this year, though the bigger question is whether Japan’s strong growth momentum can withstand rising inflation.
Japan’s CGPI rose 2.3% MoM in April, the strongest increase since April 1980 excluding the 2014 consumption tax impact, while the annual print rose to 4.9% YoY, the highest since May 2023. This surge is not broad-based. It is overwhelmingly driven by an 83.2% jump in naphtha prices, alongside a sharp rise in jet fuel. Government measures helped soften gasoline prices, but upstream chemical products also moved higher.
Naphtha sits at the core of Japan’s petrochemical model, serving as the primary feedstock for steam crackers that produce olefins such as ethylene and propylene, and aromatics like benzene and xylenes. These are upstream inputs into polymers, synthetic fibers, resins, and a wide range of intermediate goods. This tight feedstock linkage creates a high beta to crude prices, making naphtha a key transmission channel into producer price inflation.
Sustained increases raise cracker input costs and compress spreads unless passed through, while also lifting costs across downstream manufacturing chains in plastics, textiles, autos, and electronics. In Japan, this raises the risk of broader core goods inflation feeding into consumer prices, particularly via packaging, synthetic goods, and household durables. At the same time, higher petrochemical input costs spill over into other Asian supply chains, and eventually into the US and Europe through traded goods, reinforcing global goods inflation even as firms in high-demand sectors regain pricing power and pass costs through into export prices.
Importantly, only one of the 23 major categories, business-oriented machinery, saw price declines, pointing to broadening upstream pressure. Yen-based import prices rose 5.6% MoM, while export prices increased 4.0%, led by chemicals. This raises the key question of how far and how long elevated oil and naphtha prices will feed through into the broader price basket.
For now, as we approach the midpoint of the year and roughly 80 days since the Iran conflict began, the focus shifts to growth. We expect Q1 GDP, due next week, to print at 0.6% QoQ, above the consensus with upside risk. However, we explicitly see exports and capex (not consumption) to do the heavy lifting.
If inflation continues to firm while growth remains resilient, it strengthens the case for a June hike. A second hike later in the year will depend on how well domestic and global demand hold up, where we see a meaningful probability of continued resilience.
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