US Inflation Outlook: Tariffs, Labor Market, and Fed Rate Cut Prospects

US Inflation Forecast

• 📈 Janet Mui anticipates a slight pickup in US inflation for July, affecting both headline and core prints.
• 💡 Evidence suggests tariffs are beginning to contribute to rising core goods inflation, though their full impact may not yet be reflected.
• ⚠️ Shelter inflation, a major component of the US inflation basket, is showing a slowdown, with rental components lagging behind official CPI measures.

Trustworthiness of Inflation Data

• 🧐 While acknowledging market concerns, Mui believes it's premature to question the trustworthiness of CPI data following a change in BLS leadership.
• 🛠️ The data collection methodology is long-standing, carried out by experienced professionals, making significant political interference unlikely.
• 🔍 Deviations from usual trends would raise questions, but no dramatic shifts are expected.

US Labor Market Health

• ⚠️ The US labor market shows signs of weakness, including rising continuing claims, slower job creation, an increasing unemployment rate, and a slowing labor participation rate.
• 🚫 However, Mui asserts the market is not falling off a cliff and remains relatively healthy, indicating a late-cycle slowdown rather than an impending recession.

Federal Reserve Policy and Rate Cuts

• 📉 A pivot to three interest rate cuts this year, as suggested by some Fed policymakers, is considered challenging without a significantly weaker labor market and lower inflation.
• 🗓️ Mui expects a more cautious approach, likely starting with a rate cut in September, followed by another in December, contingent on data.
• ⚖️ Policy makers hold balanced views, with some concerned about tariffs and others focused on labor market weakness; the Fed's stance may lean dovish if data deteriorates and tariff impacts are transitory.