CPI NOISE AND FED INERTIA

CPI NOISE AND FED INERTIA Freya Beamish / Alexandros Xenofontos

CPI noise and Fed inertia The report in isolation contains no particularly worrying signs in core inflation that should spur the Fed on to hike sooner rather than later, but Fed speak is increasingly explicitly detracting from any one print and instead focusing on persistent failure to meet the target.

On today’s data, core was temporarily boosted by airline fares, a factor which we expect to moderate but shelter was also noisily dragged down by lodgings away from home. We anyway place a low factor on shelter as a determinant of Fed policy but it is at least notable that the drag from shelter disinflation appears to be over. Rent of primary residence and owners’ equivalent rent both rose at a solid clip of 0.3%.

There is a lot of noise in the employment and CPI prints and the implied probability of a September hike looks a little on the low side at this stage but it’s not a hill we are prepared to die on. Our rationale for hawkishness over an 18-month timeframe differs from that being expressed by FOMC members. Rhetoric from Waller and even Cook has sounded more hawkish recently but mainly just because inflation has been high.

We are more overtly concerned about the labour market rapidly tightening from close to full employment, while we see a strong case for regime change in the passthrough from domestic ULC growth to CPI inflation. The gap between CPI inflation and ULC growth was compressed for much of the 90s and through the 2010s but now seems to be increasing again, in accordance with deglobalisation, deimmigration and demographic trends. In short, we see both tighter labour markets, with reacceleration in employment on the back of broadening profits and a greater passthrough from ULC growth to inflation. So whether the Fed gets started in September or later, our conviction is that once they get over the inertia of starting, they will find their rhythm and the terminal rate could be as much as 100bps above today.

In the near term, the NFP and CPI data were likely above their trend in H1 and the summer weakness is noisy payback. It’s possible that the economy is going through a softpatch as the consumer dissaving driver hands off to further employment gains and energy ripple effects continue to feed through. But earnings data show a broadening out, consistent with building confidence and labour demand which either means falling unemployment or rising vacancies. Wage growth also looks to be bottoming already, outside of a few sectors – education and health – which we don’t really rate as reliable

indicators of wider business labour cost intentions. At worst, the economy is going to a temporary soft patch, or low NFP and CPI prints through summer are merely noise.

PASSTHROUGH FROM… 12 AUG 2026 INFLATION SPREAD IS… 12 AUG 2026

ULC remains key for understanding inflation trends Distribution of inflation is broadening again as the but the relationship has likely shifted. average sneaks higher.

FOOD, ENERGY AND… 12 AUG 2026 HEADLINE AND CORE… 12 AUG 2026

Energy has deflated from the Hormuz highs, but could Three month moving averages should increase in the swing back up next few months.