Cliff Notes: balancing inflation and growth concerns
Key insights from the week that was.
In Australia, the main event this week was the June Labour Force Survey. It was another disappointing read for job creation (+2k) that left employment effectively flat over May and June. Growth is still coming off a high base though, annual growth holding at 2.3%yr on a three-month average basis. However, it is also telling that average hours worked posted a significant decline (–1.0%), falling short of the long-run trend and providing an explanation for why underemployment ticked up to 6.0%.
The most notable and surprising development in the report was the unemployment rate’s 0.2ppt increase to 4.3% after five consecutive months at 4.1%. This looks to have been driven by a material increase in youth unemployment (ages 15-24), up 0.9ppts to 10.4% in June. While there is likely some noise in the mix, moves of this magnitude in the past have often preceded a grind higher in total unemployment.
The May and June labour market updates suggest a gradual softening in conditions may be resuming after the recent period of resiliency. Having remained on hold in July, this data adds weight to the already-strong case for a 25bp rate cut at the RBA’s August meeting.
Also of note for Australia this week, the Westpac-MI Consumer Sentiment index highlighted households’ disappointment with the RBA’s July decision. The responses received prior to the decision equated to a reading of 95.6, while those surveyed after came in at 92.0. The net result was a modest rise in overall sentiment, up 0.6% to 93.1 in July. This ‘cautiously pessimistic’ reading reflects the enduring impact of earlier cost-of-living pressures on real incomes and consumption, as evinced by ‘family finances vs. a year ago’ and ‘time to buy a major household item’ remaining 10% and 21% below their respective long-run averages. Households remain confident over the prospect of interest rate relief over the year ahead, however. At the margin, this should support a gradual recovery in finances and spending.
Rumours and debate over the future of US trade policy again filled global headlines this week, the most significant discussion being around a mooted industry tariff for pharmaceutical imports which would start at a low rate but could rise to as much as 200%.
US data meanwhile offered an update on the impact of tariffs on consumer inflation to date. The pull-forward of imports ahead of tariff implementation, the modest 10% tariff rate for most nations during the 90-day negotiation period and soft consumer demand all arguably limited passthrough in June. Still, in the CPI detail there is clear evidence of firms beginning to pass higher costs on, where possible.
Within core goods, inflation for household furnishings, apparel and recreation items all lifted noticeably, respectively to 1.0%, 0.4% and 0.4%. Used and new vehicles (-0.7% and -0.3%) were the counterpoint, likely weighed down by weak demand – durables consumption having declined at a near 4% annualised pace in Q1 GDP and the Atlanta Fed’s nowcast for Q2 GDP consistent with further weakness in total consumption. While hard to distinguish, the 0.3% gain for food was also likely supported by tariffs given the proportion of US food imported from Mexico and Canada and it’s comparatively short shelf life. Helpfully for the overall consumer inflation view and expectations is that shelter inflation continues to decelerate, registering a 0.2% gain in June, equivalent to a 2.5% annualised rate compared to the 3.8% growth between June 2024 and June 2025.
Based on producer price inflation, which decelerated from 3.2%yr to 2.6%yr after a flat result in June, and the fact that tariff increases have been delayed until at least 1 August, the impact of tariffs on inflation is likely to remain modest in the very near term. Still, with business margins coming under pressure and firms needing to invest to maintain capacity let alone expand it, it is inevitable that price increases at the wholesale level will feed through to end users. The alternative is to cut other costs, which would most likely mean a reduction in hours worked and wages growth. Our base case for the US remains inflation between 2.5%yr and 3.0%yr for an extended period despite sub-trend activity growth, limiting the FOMC’s ability to ease.
These are views consistent with the qualitative guidance from the Federal Reserve’s Beige Book. In the July edition, respondents referenced “modest to pronounced input cost pressures related to tariffs, especially for raw materials used in manufacturing and construction” and that “Many firms passed on at least a portion of cost increases to consumers through price hikes or surcharges, although some held off raising prices because of customers' growing price sensitivity, resulting in compressed profit margins”. Economic activity was said to have increased “slightly” and employment “very slightly”.
In China meanwhile, year-to-date growth of 5.3% at June means authorities’ 5.0% growth target for the calendar year is within reach. The composition of growth remains fragile, however, with consumers continuing to hold back on discretionary spending and unwilling to commit to new property investment. Despite the stimulus efforts to date, retail sales has grown at a solid, but not strong, 5.0%ytd while property investment remains down around 11%ytd and new/used property prices continue to fall. Property investment remains the biggest negative for total fixed asset investment, which at June is up 2.8%ytd, though two of the three sub-components for high-tech manufacturing (electrical machinery and chemicals) are now also declining after stellar growth in recent years and the contribution from utilities investment is highly disproportionate to its share of the economy. Foreign trade continues to provide support for aggregate growth, the trade surplus jumping back near January’s record high in June. However, net export’s contribution to GDP will naturally fade, requiring a meaningful lift in domestic demand’s contribution if our 4.6% growth forecast for 2026 is to be achieved, let alone a rate closer to 2025’s 5.0%.
Finally then to the UK. Inflation accelerated to 3.6%yr in June, 3.7%yr on a core basis, as services inflation held at 4.7%yr. In May, average weekly earnings decelerated to 5.0%yr as the unemployment rate ticked up to 4.7%. Alongside other measures like the Decision Maker Panel Survey, this data suggests the labour market is continuing to soften and that inflation risks are likely to be concentrated on the supply-side. Over the coming year, our base expectation remains a gradual policy easing by the Bank of England to a near-neutral level.
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