US inflation mixed, labor data worsens
US inflation remains mixed, but labor market weakness signals urgent need for rate cuts. Global central banks diverge: BoC eyes CPI, BoE holds, ECB signals job done. Key data shape next week’s outlook.
Weekly highlights
Mixed details
Steady
Reassuring
Largely as expected
Well below expectations
Main contributor to July growth
US: Mixed inflation data, more troubling labor data
There was some relief around the August inflation data, with CPI inflation coming in largely as expected and PPI inflation surprising to the downside (a welcome development). Headline CPI inflation rose two tenths to 2.9% YoY, the highest since January—while core CPI inflation was steady at 3.1% YoY. The details were mixed, with surprising strength in shelter, though that was to some degree driven by hotel rates. Over the last couple of years, this component has exhibited occasional surges, but they have been followed (or preceded) by offsetting declines. We have no reason to believe this pattern has broken, so we are not overly concerned.
There was a big jump in the food at home category, which could become problematic if sustained. Beef and coffee experienced notable increases, hinting at tariff impacts. Food at home inflation jumped half a percentage point to 2.7% YoY, the highest since August 2023. It seems likely to cross the 3.0% mark—the question is how soon and by how much. On the bright side, there was a downside surprise in medical care services following the prior month’s surge, and recreation services were also soft. All in all, an acceptable report that nonetheless bears watching.
There was much clearer improvement in the producer price inflation (PPI) data, not least because this also entailed a moderate downward revision to the prior month’s data, which had surprised to the upside when initially reported. Goods prices rose 0.1% MoM (versus 0.6% in July) while service prices declined 0.2% (following July’s 0.7% jump that initially was reported as 1.1%). Goods PPI inflation rate is inching higher, though at 2.1% YoY does not look threatening. Services PPI inflation eased back to 2.9% YoY, which is the second-lowest print since July 2024.
Neither the CPI nor the PPI data should preclude a September Fed rate cut. In fact, as we mentioned in these pages last week, the labor market data is beginning to suggest that more aggressive cuts may be appropriate. We still hold to our forecast of 75 bp worth of cuts this year, but that could turn into 100 bp, depending on how much further deterioration we see from here.
The data that helped most in assessing the state of the labor market this week wasn’t a current release, but rather a preliminary estimate of the next benchmark revision, to be incorporated in payrolls data early next year. The BLS (Bureau of Labor Statistics) indicated that employment was 911,000 lower in the twelve months ending March 2025. In other words, the economy added 71k jobs per month between April 2024 and March 2025, not 147k as had been previously reported. Given that this occurred prior to any material changes in immigration policy, it suggests the cooling was overwhelmingly a reflection of weaker labor demand, not the result of labor supply disruptions. The post-revision data does appear to better align with other labor market indicators such as the quits rate, hours worked, and even wage inflation, all of which had for a while pointed to looser labor market conditions than the headline payrolls data seemed to suggest.
In light of these data, there is unquestionably more urgency for the Fed to act to prevent a deeper labor market deterioration. Slow hiring is still OK, but we do not wish to see it give way to outright firing.
BoC: August CPI to decide rate cut
We expect the Bank of Canada (BoC) to lower interest rates by 25 basis points at its upcoming meeting. However, this will depend on the August CPI data, which is scheduled for release on Tuesday, one day prior to the rate announcement.
Recent Canadian economic indicators have softened but remain largely consistent with the BoC’s projections. Second quarter GDP contracted by 1.6%, closely aligning with the 1.5% decline forecasted in the July Monetary Policy Report. Preliminary data for Q3 indicates that this downturn, primarily driven by weaker net trade and reduced manufacturing activity, is not expected to continue.
Although certain sectors continue to be significantly affected by trade disruptions, these challenges have not become pervasive throughout the broader economy. Labor market conditions have eased, with job losses predominantly observed in industries highly reliant on trade.
Should next week’s inflation data undershoot expectations, additional rate reductions are probable. We currently project two further cuts within the year, with their scheduling contingent upon forthcoming inflation data.
BoE: Rate cuts are uncertain
The Bank of England (BoE) is expected to keep interest rates unchanged next week, while market observers remain attentive to the possibility of rate cuts later in the year. In August, the Monetary Policy Committee (MPC) came close to voting for a rate cut despite elevated inflation, though still within the Bank’s projections, and a labor market that remains stable yet subdued. Recent Purchasing Managers’ Index (PMI) data suggests consistent economic activity.
July GDP was steady. A 0.1% increase in services offset a 0.9% decline in industrial output, primarily driven by weaknesses in transport equipment and metal production. Consumer services were flat, while business services declined 0.1%.
Labor market conditions continue to be lackluster, with flat employment levels and decelerating wage growth, suggesting that recent GDP improvements may prove temporary. Nevertheless, robust business sentiment surveys indicate some underlying resilience, which mitigates downside risks and reduces the probability of an additional rate cut this year.
For now, we continue to expect a rate cut in November, but this depends largely on forthcoming data.
ECB: Job done
While there is considerable soul searching at the Fed on the appropriate path of monetary policy, the ECB’s own Governing Council seems satisfied that their job is done. As widely anticipated, all three policy rates were left unchanged. Given that “indicators of underlying inflation remain consistent with our two percent medium-term target” and given that “risks to economic growth have become more balanced,” the overall assessment is that the economy and monetary policy are “in a good place.” Absent renewed shocks that threaten growth, the ECB is done cutting.
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There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.