The US inflation rate was fairly benign in the latest reading, with both the headline and core numbers increasing just 0.1 per cent – better than market expectations. While weaker gasoline and energy prices were expected, the surprise came from softer services and housing inflation, which were key drivers of the lower inflation print.
While this data is a positive signal for the Fed, it’s unlikely to prompt an immediate policy move. Declining energy prices are likely fleeting amid ongoing tensions in the Middle East. At the same time, tariff impacts are likely to start showing up in the inflation numbers in the months ahead, despite recent de-escalation in the US-China trade relationship.
The Fed has been data-driven in its approach, but this is increasingly difficult in a noisy and uncertain environment. The erratic implementation of tariffs has muddied the waters, making it harder to interpret key indicators such as prices, sales and production. This uncertainty has made it more difficult for businesses to plan, leading them to become more cautious in their pricing, hiring and capital expenditure decisions.
Since the last Fed meeting in May, trade policy announcements have been erratic. Steel and aluminum tariffs have doubled to 50 per cent, and the potential for reciprocal tariffs remains a looming threat. Meanwhile, tariffs on Chinese goods have fluctuated dramatically, reaching as high as 145 per cent before coming down to 30 and then 10 per cent. The whipsawing of these policies makes it impossible to determine the near-term effects on the economy.
The House has passed a budget that includes deficit-financed tax cuts, which could provide a boost to growth and inflation in the short-term. However, section 899 of the bill introduces the potential for punitive taxes on countries that impose taxes the US deems unfair to American corporations. This provision could negatively impact net foreign investment – an essential source of funding for the US budget deficit and a critical offset to the country’s inadequate domestic savings rate.
Meanwhile, the “dot plots” from the Summary of Economic Projects indicate that the Fed’s Board of Governors is expecting two 25-basis-point cuts this year. (The dot plots illustrate the anticipated path of the federal funds rate, with each voting member projecting where they believe the rate will be at the end of each year for the next several years.) While we don’t anticipate a shift in this outlook in the coming meetings, we believe the Fed is unlikely to move before September.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Housing affordability remains one of Canada’s most pressing challenges, but current policies aren’t delivering the results Canadians need. Meaningful progress will require a better understanding of regional differences, along with stronger coordination and accountability across all levels of government.
From development charges to zoning bylaws, explore the key barriers—and what needs to change—in our latest Housing Affordability Watch: Policy Misfires Impeding Progress on Affordability
Independent Opinion
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