What to make of US inflation trends, and UK Q2 GDP

What to make of this week’s US CPI print – does it make it more likely that the Fed will cut in September? 

Unlikely, although recent movements in bond markets suggest that this is probably the base case for now. 

Coming in unchanged at 2.7% the reality is that headline inflation is still much higher than it was at the end of Q1, with core prices rising to 3.1% in July, and the highest since February. 

This number alone reinforces the challenges facing the US central bank along with today's unexpected surge in headline PPI which accelerated in July to 3.3% from 2.4%, well above forecasts. 

All this chatter from the likes of President Trump, as well as many armchair critics comes across as a little reckless when inflation risks in the US are becoming increasingly two-sided due to the effects of tariffs. 

You will hear no end of commentary from people insisting that the Fed is being too slow, and that may well be the case, however there is also the risk that they could cut too quickly, and be forced to raise rates again if inflation ramps up above 3% in the coming months. 

This is why talk of a 50bps rate cut in September comes across as reckless at a time when tariff effects remain a huge unknown, and in a lot of cases have yet to be felt. 

You only have to look at today's PPI numbers to understand that inflation pressures are far from benign.

The US economy may well be slowing however it’s not due to interest rates being too high, but due to concerns about rising prices.

UK Q2 GDP came in better than expected at 0.3%, well above expectations which on the face of it looks a strong number, albeit weaker than Q1, putting the UK at the top of the G7 in H1 of 2025. 

Dig a little deeper however and there are some worrying trends. A June rebound in economic growth helped to offset a weak April and May, but most of the gains were driven by the public sector and government spending.

That’s simply not sustainable when set against a weak performance from the private sector.

It’s all very well boosting the economy with public spending but unless it’s backed by strong growth in tax revenue from the private sector then it’s simply delaying an inevitable reckoning. 

This is no better highlighted than in the business investment numbers which showed a decline of 4% in Q2. Also performing poorly wholesale and retail trade saw a decline of 0.9% partially reversing the gains seen in Q1. 

On the plus side, services performed well in Q2 with health and social work activities increasing by 1.1% as government spending boosted the NHS. Information and communication performed best with a 2% gain. 

We also saw a strong performance from pharmaceuticals suggesting some front running of possible tariffs in this sector.

This week’s wages numbers also proved to be a headache for the BOE showing little sign of a slowdown, coming in steady at 5%, while unemployment remained steady at 4.7%, however it is interesting to note that according to the ONS 164k jobs had been lost since the government came to power just over a year ago.

According to the Centre for Policy Studies it is now £2,367 more expensive to hire a worker on the minimum wage than it was in 2024.

This number alone illustrates the economic illiteracy of the government's policy when it comes to low paid jobs and the damage it is doing to the lowest paid.