US consumer buffer continues to thin

Thin US savings highlight consumer risk, UK’s inflation pop doesn’t derail cuts, Japan’s steady BoJ guides cautiously, and Australia’s job surge lifts hike odds as markets eye next week’s central bank cues.

• US: The consumer buffer thins
• UK: Inflation rebound not enough to preclude rate cuts
• Japan: Quiet meeting
• Australia: Surprise drop in unemployment
• Spotlight on next week

Weekly highlights

US: The consumer buffer thins

The concept of a K‑shaped economy has been percolating in macro commentaries for a while now, and with good reason. While strong wealth accumulation in the top income quartiles implies little downside risk to consumption in that space, the loosening labor market presents a more material threat for low‑income consumers whose incomes are primarily labor‑derived. New data this week put the household savings rate at just 3.5%, the lowest level since late 2022. It would be unwise to ring the alarm bells too loudly because in recent years such downshifts in the savings rate were subsequently alleviated by upward revisions to income, and this may happen yet again. What is different now, however, is that the labor market itself is at a much more precarious point, with job growth having slowed dramatically over the last nine months.

Nobody can tell how much of this reflects the effects of AI‑related labor displacement. However, we can be pretty sure that those effects will intensify, rather than dissipate, over the coming year. As such, a low savings rate highlights a potential consumer vulnerability insofar as a job loss in an environment of reduced savings could require more substantial consumption cutbacks.

UK: Inflation rebound not enough to preclude rate cuts

Inflation climbed to 3.4% YoY in December, but this figure is still below what the Bank of England expected. Food inflation went up slightly, from 4.2% to 4.5%, which is also less than the Bank’s forecast of 5.3%. This suggests that worries about consistently high food prices might be exaggerated. Airfares, though known for their volatility, only rose a little, so they had minimal effect on overall services inflation.

In addition, core services inflation has remained steady at 4% for the past three months, giving little reason for the Bank of England to change interest rates during its next meeting. The Bank will probably hold off until there are clearer signs of improvement, especially since many service prices are updated once a year and the big hikes seen last year aren’t likely to happen again. Overall, we expect that if weak hiring and moderate wage growth persist, the Bank may lower rates in March and again in June, bringing the Bank Rate to 3.25%.

Japan: Quiet meeting

The Bank of Japan (BoJ) kept policy settings unchanged, as widely expected, and reverted to its earlier view that inflation is likely to remain around the target range — a stance it held through October last year. The most notable update was an upward revision to the FY2026 real GDP growth forecast, raised by three-tenths to 1.0%. Core CPI projections were also lifted across the forecast horizon: to 3.0% (+0.2 ppt) in FY2025, 2.2% (+0.2 ppt) in FY2026, and 2.1% (+0.1 ppt) in FY2027. These adjustments closely align with our own updated forecasts from December 2025.

Forward guidance was left unchanged, with the BoJ reiterating that it “would continue to raise the policy interest rate” if its economic outlook is realized. During the press conference, Governor Ueda was pressed on the possibility of accelerating rate hikes. While he didn’t rule it out explicitly, he emphasized there was no need to rush and noted the BoJ stands ready to act with the government under “exceptional” circumstances — though he did not define what those would entail. He also stressed that the yen will be monitored closely, given its increasing influence on inflation dynamics. Overall, the first meeting of 2026 was uneventful, but the tone suggests March or April may not be as quiet.

More importantly, headline national CPI fell sharply to 2.1% YoY in December as the Takaichi administration’s energy subsidies began feeding through. Core CPI (ex‑fresh food) eased by 0.1% MoM to 2.4% YoY — a sizeable drop from 3.0% in November. Food inflation remains elevated at 6.7% YoY, though this is well below July’s 8.3% peak. We expect inflation to moderate into February due to favorable base effects, complicating calls for a more aggressive tightening path.

PMI data for January featured positive surprises, with the composite index up 1.7 pts to 52.8 and a 1.5‑pt jump in manufacturing PMI to the highest level since mid‑2022. New export orders jumped 4.9 pts to 52.2 — the highest level in nearly five years. This is consistent with last month’s industrial production signals and with our view that Japan could benefit materially from AI, as production shifts into higher‑value segments.

Against this backdrop, we maintain our forecast of just one rate hike this year, likely in the second half. That said, a persistently weak yen — particularly if it breaches and holds above 160 — could pressure the BoJ to move earlier. Markets are increasingly pricing this risk scenario, with expectations for a 25 bp hike in July now nearly fully reflected in pricing. For now, attention shifts to politics, as campaigning for the snap elections — officially called this week — gets underway.

Australia: Surprise drop in unemployment

December’s labor market report delivered an unexpectedly strong set of numbers, with the economy adding 65.2k jobs — nearly twice the consensus — and the unemployment rate falling by two‑tenths to 4.1% despite expectations of an increase. The data meaningfully strengthens the case for a February rate hike, though we remain cautious about over‑interpreting a single month’s print, particularly given the seasonal distortions often seen around the holiday period, a similar experience in the last two years.

A key driver of the upside surprise was strong participation at 66.7%, led by a striking 2.2‑ppt jump among workers aged 15–24. The ABS highlighted this dynamic in its release, noting that it drove a sharp 0.9‑ppt drop in unemployment for the cohort. This matters because, while the 15–24 group represents just 12.6% of the population, it accounts for a disproportionately large share of both employment (21.8%) and the labor force (23.1%), meaning swings in youth participation can materially sway headline figures.

The composition of job gains was also encouraging: full‑time employment rose by 54.8k, reversing last month’s similarly sized decline. Still, the seasonal pattern in Q4 should not be dismissed, and it may also help explain why household spending surprised to the upside, rising 1.0% MoM in November, supported by robust retail activity and effective promotional campaigns. Still, the direction of travel in the labor market is materially important and, with it near full capacity, further gains are hard to achieve.

The focus now shifts to next week’s Q4 CPI release. If inflation lands around the RBA’s expected 0.7% QoQ, there remains a solid case for the Bank to stay on hold in February. However, a stronger‑than‑expected print would elevate the risk of a hike. We expect trimmed‑mean inflation to come in at 3.2% YoY and still believe the RBA would benefit from waiting for clearer data in the first half of the year — giving itself more flexibility to ease in the second half should conditions allow.

Spotlight on next week

• Both the Fed and Bank of Canada to hold rates. 
• Aussie inflation to rise.