德勤 -全球经济每周动态 Weekly Global Economic Update 20260815

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WeeklyGlobalEconomicUpdate

What'shappeningthisweekineconomics?Deloitte'steamofeconomistsexaminesnewsandtrendsfromaroundtheworld.

ByIraKalish

Article·7-minread·25August2026

WeekofAugust24,2026

·FurthercommentsonUSgovernmentbondyields

·Europeaneconomiesfaceclimate-drivendisruptions

·China'seconomyshowssignsofweakness

FurthercommentsonUSgovernmentbondyields

·Lastweek'sfinancialheadlineslargelyfocusedonthesharpriseinyieldsongovernmentbondsaroundtheworld:

Notably,theyieldontheUSgovernment's30-yearbondhit5.33%—thehighestsince2007.TheyieldontheUS

government's10-yearbondhit4.75%—thehighestsince

January2025.Meanwhile,theyieldonJapan's10-yearbondhit2.96%—itshighestlevelin30years.Andtheyieldon

Germany's10-yearbondhit3.26%—thehighestsince2011.

Whydidthishappen?First,considerthedeterminantsof

governmentbondyields.Theoretically,abondyieldisa

forecastofshort-terminterestratesinthefuture.Assuch,theyarealsoaforecastoffuturemonetarypolicy,which,inturn,hasmuchtodowithexpectationsoffutureinflation.WhentheconflictintheMiddleEastbegan,bondyields

increased,whichreflectedexpectationsforhigherinflationand,consequently,tightermonetarypolicy.

However,inrecentweeks,asoilpricesstagnated,

expectationsofinflationremainedtame,whileexpectationsoftightermonetarypolicytendedtoease.Yetdespitethat,

bondyieldshavelatelyincreasedonceagain.Why?

Thereasonisthat,inadditiontoexpectationsofinflation

andmonetarypolicy,bondyieldsalsoreflectexpected

supplyanddemandconditionsinthebondmarket.Ifsupplyincreasesrapidly,investorsmightrequireahigherreturntoabsorbabiggersupplyofbondsintotheirportfolios.If

investorsfeelthatthereislikelytobeexcesssupplyinthe

market,theywillboosttheso-called"termpremium,"whichistheadditionalyieldinvestorsrequirefortheriskof

holdinglonger-termsecurities.

Therearetwothingscurrentlyhappeningthatmightbecausingariseinthetermpremium:

oFirst,therehasbeenadramaticsurgeinthe

volumeofcorporatedebtissuedbytechnology

companies,mainlytofundthebuildoutofAI

infrastructure.Theriseinthecostofinsuringthis

debtmayindicatethatsomeinvestorsarebecomingconcernedaboutthevolumeofdebtandthe

potentialabilityofissuerstoservicethosedebts.

AlthoughmostofthisdebthasbeenissuedbyUS-

basedcompanies,itisnotsimplyaUSissue,becausetechcompanieshaveincreasinglysolddebtoutsidetheUnitedStates.

oThesecondfactor,whichappearstobecommon

toseveralcountries,isincreasinginvestorconcern

aboutthesustainabilityoffiscalpolicy.IntheUnitedStates,Japan,France,Italy,andtheUnitedKingdom,thelevelofgovernmentdebtrelativetogross

domesticproductishighandrising.Thesurgein

debtfirstbeganduringtheglobalfinancialcrisis,and

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thenacceleratedduringtheCOVID-19pandemic.Consequently,debtlevelsinseveralkeyeconomiesarenowclosetohistorichighsrelativetoGDP.

Thiswouldnotbesuchaproblemifnotfortwofactors:First,demographicsareworkingagainstfiscalprobity,withrisingelderlypopulationsandstagnantordecliningworking-agepopulations.

Second,politicalfragmentationandpolicygridlockarehamperingcountries’abilitytotakedifficultstepstoreinintheirborrowinglevels.

Yet,whyareinvestorssuddenlyworriedwhentheymostlyignoredfiscalpolicyforsolong?ConsidertheUnitedStates.Icanrecallbackinthe1980shearinganalystswarnthat

fiscaldeficitswerenotsustainableandthat,ultimately,theywouldleadtoafinancialcrisis.Thatdidn’thappen.Rather,fornearlyhalfacentury,bondyieldsgraduallydeclined

despitelackoffiscaldiscipline.Thispartlyreflectedthe

dominantroleoftheUSdollaringlobalfinance.Italso

reflectedconfidencethattheUSeconomywouldgrow

strongly,therebycreatingtheconditionsforstronggrowthoftaxrevenue.Anditreflectedconfidencethatthe

governmentwouldultimatelytakethestepsrequiredtoreduceborrowing.WhentheUSCongressagreedto

significantreformstoSocialSecurityinthe1980s,thisengenderedconfidenceinfiscalintegrity.

Now,thingsarechanging.Today’sdeficitisunusuallylarge.Taxeshavebeencut,defensespendinghasincreased,

programsfortheelderlycontinuetogrowdueto

demographics,andthereisnoclearpoliticalconsensusfor

taxincreases.Thus,itisdifficulttoenvisionascenarioin

whichfiscalpolicymovesinacontractionarydirectioninthenearterm.Meanwhile,lastyear’scombinationofrisingbondyieldsandadecliningUSdollarwasviewedbysomeanalystsasevidencethatglobalinvestorswerebecomingsomewhat

lessamenabletoabsorbinglargeamountsofUSgovernmentdebt.

Ontheotherhand,itisworthkeepinginmindthat,intheUnitedStates,theyieldonthebenchmark10-yearbondis

actuallylowerthanitwasformuchofthe1990sandearly2000s.Thus,panicisnotwarranted.Indeed,forawhile,webecameaccustomedtounusuallylowbondyields.During

theperiodbetweentheglobalfinancialcrisis(2008to2009)andthepandemic(2020to2021),yieldswerehistorically

low.Onecouldsayitwasanaberrationandthatwemaynowbereturningtonormalcy,atleastintermsofbondyields.Butthisisnotnormalcyintermsoffiscalpolicy.

FortheUnitedStates,theriskisthat,ifaneconomicor

financialcrisistakesplace,thegovernmentmaynothavethekindoffiscalspaceitpreviouslyhadtofightsuchcriseswithfiscalstimulus.Theriskwillbethatanysuchactioncould

leadtoasharpriseinbondyields,therebyoffsettingthepositiveimpactofstimulus.

Followingconcerninfinancialmarketsaboutrisingbond

yields,onWednesday,USTreasurySecretaryScottBessent

announced

thattheUSTreasurywouldengageinpurchasesoflong-datedTreasurysecurities,fundedbythesaleofshort-datedsecurities,therebyshiftingthemixofmaturitiesheld

bythepublic.Theideawastoputdownwardpressureontheyieldfromlong-datedsecurities,therebyoffsettingtherecenttrendtowardmuchhigheryields.

Thisactionwasinitiallysuccessfulinmoderatelytaming

long-termbondyields.Butthesuccessdidnotlastlong.Bythenextday,yields

resumed

theirupwardjourney.Investorsappearedtobelievethatthefundamentalsofsupplyand

demandinthebondmarkethavenotchangedandthat,consequently,thereisnoneedtopermanentlychangethepricingofgovernmentbonds.Indeed,theTreasuryactiondidnotadjusttheactualsupplyofgovernmentdebt.

TheTreasuryactionwassimilartowhattheUSFederal

Reservedidin2008andin2020,whenitengagedin

quantitativeeasing(purchasesoflong-termbonds),which

wasmeanttoreviveafailingeconomybyloweringlong-

termborrowingcosts.Itwasalsodoneatatimewhen

inflationwasunusuallylow.Thistime,however,isdifferent.

Inflationremainselevatedwhiletheeconomycontinuesto

showrelativestrength.Plus,theUSFederalReserveis

consideringtighteningmonetarypolicy,notlooseningit.

Notably,FedChairKevinWarsh

justified

thedecisiontonotraisethebenchmarkinterestratedespiteelevatedinflationbysayingthatthemarketisdoingtheFed’sjob.Thatis,risingbondyieldshavetheeffectofreducinginflationarypressures.Yet,iftheTreasuryattemptstosuppressbondyields,willtheFedthendecidetoraiserates?Weshallsee.

Also,itisworthnotingthatthepriceofcrudeoilhas

risen

sharplyinrecentdaysasinvestorsbecamemorepessimisticaboutaprospectiveendtotheUS-Iranconflict.Ifthe

conflictcontinuesand,asaresult,theStraitofHormuz

remainsclosed,therecouldeventuallybeafurtherriseinthepriceofoil.Thatisbecause,eventually,theabilitytofillthegapbetweensupplyanddemandwithreservesmaydiminishformosteconomies.

WEEKLYGLOBALECONOMICUPDATE•PG2

WEEKLYGLOBALECONOMICUPDATE•PG3

Inthiscontext,Chinaiskey:Ithasbeen

tapping

itsmassivereserves,therebyenablingasharpreductioninimports.Butthiscannotcontinueindefinitely.Thus,thecurrentincreaseinthepriceofoilreflectsagrowingbeliefthatthisscenariocouldeventuallyplayout.Ifthepriceofoilrisesfurther,it

couldcontributetohigherinflationinmajoreconomiesand,consequently,tightermonetarypolicy.Thus,elevatedbondyieldsmakesense.

Meanwhile,thefundamentals(increaseddebtissuanceby

techcompaniescombinedwithincreasingconcernsabout

fiscalprobityinmajoreconomies)remain.IftheUS

governmentwantstoreducebondyields,agoodstrategy

wouldbetoofferacrediblelong-termplantoreinin

governmentborrowing.Inanyevent,itappearsthatthe

Treasuryaction,whichwasrelativelysmallcomparedtothemassivesizeoftheUSTreasurymarket,didnothavethe

desiredimpactonbondyields.Itdid,however,coincidewitha

decline

inthevalueoftheUSdollar.

Thedropinthevalueofthedollargoesagainstthe

Treasury’sstatedgoalofengenderingastrongdollar.The

declineinthevalueoftheUSdollarduetotheTreasury

actionhasbeen

called

a“debasementtrade.”Thatis,it

suggestsinvestorsarefearfulthat,ratherthantakingdifficultstepstoreininborrowing,governmentswilldebasethe

currencybyinflatingawaygovernmentdebt.Plus,ifthe

governmentartificiallysuppressesbondyields(ashasbeentrueinJapan),theonlywayinvestorportfolioscanreflectthetrueriskofholdingbondsisforthecurrencyto

depreciate.AstheeconomistRobinBrookssaid,thecurrentstrategyoftheUSTreasuryislike“playingwithfire,”asitcouldleadtoasharpdeclineinthevalueoftheUSdollar.

Notably,thedollarwas

not

theonlyassetthatrespondedtotheTreasuryaction.Thepriceofgoldshotup,asdidthe

priceofBitcoin.Thisisnotsurprisingasnon–interest-

bearingassetsbecomemoreattractivewhenthereturnon

interest-bearingassetsdeclines.Plus,ifinvestorsperceivetheTreasuryactionasboostingthelikelihoodofhigher

inflation,theninflationhedgessuchasgoldbecomemoreattractive.

Also,thelatestinterventioninthebondmarketfollowstheinterventionbytheUSTreasuryDepartmentinthecurrencymarkettosupporttheJapaneseyen.That,too,failedto

significantlymovethedialfortheyen.Onepossible

explanationisthattheinterventiondidnotmateriallyalterthefundamentalsinfluencingtheyen’svalue.

Europeaneconomiesfaceclimate-drivendisruptions

WhenIwasyoung(whichwasalong,longtimeago),my

parentsandIusedtotakeholidaysinEuropeduringseveralsummers.Itwasgreat,andtheweatherwasgreat.There

werenoairconditioners,norweretheyneeded.That,

however,isnolongertrue.Inthepastdecade,therehave

repeatedlybeenrecordhightemperaturesthroughoutEurope—atrendthatmanyresearchersassociatewithclimate

change.AndalthoughEuropeangovernments,businesses,andpeoplehavetakensubstantialactiontomitigateclimatechange,itdidn’tmatter.Afterall,climatechangeisaglobalproblem.Iftheworld’slargestemittersofcarbon(suchas,China,theUnitedStates,India,Russia,andothers)don’t

rapidlyreduceemissions,allofEurope’seffortswillbefornought.

Fromaneconomicperspective,therecentsummerheatis

significant.Hightemperaturescausedwaterlevelsinriverstodecline,therebydisruptinginlandtransportation.AttheshallowestpointintheRhineinGermany,thewaterlevelisnowata

record

low.Thishascreatedshortagesand

bottlenecks,leadingtohighercostsoftransportinggoods.Indeed,itisreportedthattransportvesselsareonlybeingfilledto30%capacitytoavoidgrounding.Thiswilllikelyleadtolowereconomicactivityandhigherinflationthanwouldotherwisebethecase.

Meanwhile,thelowwaterlevelishavinganimpacton

energyproductionaswellasontherolloutofdatacenters.ThelatterwillbecrucialifEuropeistobecomecompetitiveintheartificialintelligencearena.Asforenergy,lowwaterlevelsmeanlesshydroelectricpower.Italsomeansthat

nuclearpowerplantsmustoperatebelowcapacityaswaterisneededtocoolreactors.

Interestingly,amodestriseintemperaturescanhavea

positiveeconomicimpact.Thisisthe

insight

from

researchersatamajorEuropeaninsurancecompany.Theyfoundthat,belowacertainthreshold,“warmingreducesheatingcostsandisassociatedwithmodestproductivity

gains.”That,inturn,canboosteconomicactivity.

However,theyalsofoundthat,whentemperaturesrise

aboveacriticalthreshold,thereisanoppositeeffect,mainlythroughlabor-marketchannels.Thatis,hightemperatures

canunderminelaborproductivity.Allianznotedthat“wageadjustmentsfollowproductivitywithalag,sotheshort-runcostfallsdisproportionatelyonfirmprofitabilitybefore

graduallytransmittingtohouseholdincomeand

consumption.Asecondsmallerchannelrunsthroughenergy:

Consumptionrisesbyaround1.2%perdegree,raisingfirms’inputcostsatexactlythetemperatureswherelabor

productivityisfalling.”

WEEKLYGLOBALECONOMICUPDATE•PG4

Theconclusionisthat,iftemperaturescontinuetoriseas

theyhaveinrecentyears,therecouldbeasignificant

negativeimpactonrealGDP.Moreover,thiswillhave

seriousfiscalconsequencesforgovernmentsastaxrevenue

willdeclinewhileexpenditurestosupportanaging

populationcontinuetorise.Tocontendwiththisnew

environment,Allianzrecommendsnewregulationsregardinglaborandbuildings.

China’seconomyshowssignsofweakness

TheChinesegovernmentreleasedseveralmonthlyeconomicindicatorsthatrevealcontinuedweakness.First,

retail

saleswereup0.6%inJulyfromayearearlier—thethirdmonththisyear,inwhichsaleswereuplessthan1%.This

representsverymodestgrowthandmayreflectcontinued

cautiontospendingbyhouseholds,someofwhichhave

experiencedalossofwealthinthepropertymarket.

Notably,salesofautomobilesweredown17%fromayearearlier.Excludingautos,retailsaleswereupamorehealthy2.5%.Still,salesofotherlargedurableproductsweredownsharplyincludingfurnitureandbuildingmaterials.Ontheotherhand,salesofcommunicationsequipmentwereup

sharply.

Meanwhile,Chineseindustrial

production

wasupamodest4.5%inJulyfromayearearlier.Thiswasslowerthanin

mostmonthsinthepastthreeyears.Growthwasstrongincertainindustrialsectorsincludingcomputersand

communications(up19.1%),railwayandshipbuilding(up13.6%),andautomotives(up8.7%).

Importantly,fixed-asset

investment

continuedtodecline

sharply.Inthefirstsevenmonthsofthisyear,fixed-asset

investmentwasdown6.7%fromayearearlier—theworstperformancesincetheheartofthepandemic.Property

investmentwasdownastunning19.2%.Whenpropertyisexcluded,overallinvestmentwasdown5.7%.

Manufacturinginvestmentwasdown1.7%.Ontheother

hand,industriesfavoredbythegovernmentsawbig

increasesininvestmentincludinginformationtransmission(up26%),airtransport(up15.7%),andcomputer,

communication,andelectronics(up7.8%).

Exports

remaintheonlybroadareaofstrengthforChina’seconomy—rising23.9%inJulyfromayearearlier—andaregrowingrapidly.

Chinacontinuestoexhibitanunbalancedeconomy:

Domesticdemandisrelativelyweak,largelydueto

continuingtroublesinthepropertymarket.Exportstrengthderivesfromaggressivepricingofattractiveandinnovativeproducts.Relianceonexports,however,couldpresent

challengesgiventhatsomemajortradingpartnersare

complaining

aboutallegedsubsidiesandareincreasingly

discussingprotectionistmeasurestorestrainimportsfrom

China.Assuch,Chinamayseekadditionalwaystostimulatedomesticdemand.However,althoughtherehasbeensome

fiscalstimulusfromthegovernment,ithasnotyetledtoanaccelerationindomesticdemand.

WeekofAugust18,2026

Fiscalpolicyisdrivingbondyieldshigherinsomedevelopedeconomies

USinflationeases

WhitherUSconsumers?

Fiscalpolicyisdrivingbond

yieldshigherinsomedevelopedeconomies

Whyarebondyieldssohighfordevelopedcountries?Onepossiblereasonisthatfiscalprobityappearstohave

weakened.Manycountriescurrentlyhavehistoricallyhighdebtlevelsanddeficitscomparedtotheirgrossdomestic

product.Moreover,thisishappeningdespitethelackofacrisis,whichisnormallythetimewhenfiscalprobitycomeundergreaterpressure.

Whyisthishappening?First,deficitsare,inpart,dueto

demographics.Thatis,almosteverymajordeveloped

economyiscurrentlyfacingrisingcostsofservicingtheneedsofanolderpopulationthroughpensionsandhealthcare.

Forexample,intheUnitedStates,thenumberofpeople

receiving

retirementbenefitsfromSocialSecurityhasrisenfromabout31millionin2000to56milliontoday—atrendthatislikelysettocontinue.Absenttaxincreases,offsettingspendingcuts,oracceleratedeconomicgrowth,such

pressurescouldkeepthedeficitelevated.

Second,inmostdevelopedcountries,thereisanincreasing

consensusontheneedtospendmoreondefense—especiallyfollowingtheUkraine-Russiaconflictandquestions

surroundingtheNorthAtlanticTreatyOrganizationand

otheralliances—whichwilllikelyexertfurtherfiscalpressureontheireconomies.

Third,manycountriesarefacingpoliticalfragmentation,

whichcanmakeitincreasinglydifficulttoreachaconsensusonhowtoaddressfiscalimbalances.IntheUnitedStates,for

WEEKLYGLOBALECONOMICUPDATE•PG5

example,significantchangestotaxes,defensespending,orthingslikeSocialSecurityorMedicare,haveoftenprovenpoliticallydifficulttoenact.

Finally,thedecades-longperiodinwhichborrowingcosts

werehistoricallylowappearstohavelargelyended.The

rise

inborrowingcostscameaboutfollowingthepandemic,

whengovernmentssignificantlyboostedspending,andwhensupply-chaindisruptionsledtomuchhigherinflation.

Today,borrowingcostsarehighandcouldgohigher

dependingonavarietyoffactorssuchasinflation,monetarypolicy,andconfidenceinfiscalpolicy.Andhigherborrowingcostsalsoexacerbatedeficits.

Thechallengenowisthat,ifgovernmentsdonottake

crediblestepstorestorefiscalprobity,borrowingcostscouldrisefurther.Moreover,whenthenexteconomiccrisiscomes(anditwillcomeeventually),governmentsmightnothave

sufficientfiscalspacetorespondinawaythatdoesnotcauseafurtherriseinborrowingcosts.

IntheUnitedStates,governmentborrowingcostshave

increased

sharply

,withtheyieldonthe30-yearbondhittingitshighestlevelintwodecades.Thissuggeststhatinvestorsareseekingadditionalcompensationforperceivedrisks

associatedwithholdinglong-termgovernmentdebt.

EventheUSgovernment—whileinterveninginthecurrencymarkettosupporttheJapaneseyen—didnotsellUS

governmentbonds.Rather,itsoldeurostoboosttheyen.ThissuggeststhattherewasconcernthatthesellingofUSdollarscouldboostUSborrowingcostsfurther.

Whatisnotableisthat,evenwithinflationappearingto

decelerateandwithsomeevidencethattheeconomyis

slowing(slowemploymentgrowthandslowretailsales

growth),bondinvestorsstillexpecthigherreturns.

Moreover,

expectations

formonetarypolicyhaveshifted,

withinvestorsnowseeingahighprobabilitythattheFedwillnotraiseratesinSeptemberandahighprobabilityofonly

oneratehikebeforetheendoftheyear.Despitetheshiftinsentimenttowardalesstightmonetarypolicy,investors

wanttobecompensatedfortheriskofholdinggovernmentbonds.

Whatdoesthistellus?Oneinterpretationisthatinvestors

arelikelynotfocusingoninflationexpectations,monetary

policyexpectations,oreveneconomicgrowth.Rather,theyarefocusingonfiscalpolicy.Thatis,itcouldbethecasethattheyareincreasinglyworriedabouttheunusuallylarge

budgetdeficit.Plus,theymightbeconcernedthatneither

majorpoliticalpartyintheUnitedStatesishavingaseriousdiscussionaboutreininginthedeficit.

Theriseingovernmentborrowingcostsisalready

influencingUSeconomicconditions.Mortgageinterest

rates

haverisentotheirhighestlevelinayear.Consideringallelseremainsthesame,thiscoulddampenactivityinthehousingmarket.Thisisalsoan

example

ofwhatFedChairWarsh

suggested,thatis,marketswilldotheworkoftheUS

FederalReservebyadjustingborrowingcostsontheirown.

TheimplicationisthattheUSFeddoesnotneedtodo

anything.Plus,ifborrowingcostsarerisingprimarily

becauseofconcernsaroundfiscalpolicy,theFed’sabilitytodirectlyaddressthoseconcernsmaybelimited.Allitcandoisadjustpolicyinresponsetoinflationandemployment

data.If,however,fiscalpolicycontributestoasharpriseinyields,which,inturn,suppresseseconomicactivity,theFedwilllikelyhavetoabsorbthatinformationintoitsfuture

deliberations.

InJapan,PrimeMinisterTakaichi

intends

toboost

governmentinvestmentbyaboutUS$2.3trillioninthe

comingyears.Thisismeanttofundinvestmentsinkey

technologies,thegoalofwhichistoboostproductivityand,consequently,economicgrowth.Foreconomists,themostcommonmeasureofproductivityisknownastotalfactor

productivity,whichmeasurestheimpactonlaborand

capitaloutputduetomoreefficientuseofresources.Itisoftendrivenbytheadoptionofnewtechnologies.

Inthelastquarter-century,totalfactorproductivityremainedflatinJapan,whilerisingintheUnitedStates,Germany,andneighboringSouthKorea.Thecurrentgovernmentiskeentochangethistrend:Theideaisthat,althoughtheexpenditurewillboostthebudgetdeficit,itcouldultimatelyleadtofastereconomicgrowthand,consequently,fastergrowthof

governmentrevenue,therebyreducingthedeficit.

Meanwhile,theplannedexpansivefiscalpolicyofthe

Japanesegovernmenthasalreadyputupwardpressureongovernmentbond

yields

.Onechallengeisthat,evenbythegovernment’smostoptimisticprojections,theboostto

productivitygrowthwilllikelycomelongafterthe

governmentissuesdebtthatmustbeserviced.Inaddition,thereremainsuncertaintyastowhetherthegovernment’s

programwillbesuccessfulinboostingproductivitygrowth.Ifnot,thefiscalimplicationscouldbecomemore

challenging,whichmaypartlyexplainwhythereisupwardpressureonbondyields.

Also,despiteprojectionsofproductivityacceleration,thegovernmentwillstillneedtodealwithademographic

challenge.Thatis,thereisagrowingelderlypopulationin

WEEKLYGLOBALECONOMICUPDATE•PG6

Japan,combinedwithadecliningworking-agepopulation.

Thisdemographictrendislikelytoaddtofiscalpressuresforthegovernment.

Therecentdepreciationoftheyenhadmuchtodowith

fiscalpolicy.Eventhoughbondyieldshaverisensharply,

thereremainsdownwardpressureontheyen.Solongas

investorsareconcernedaboutlong-termfiscalsustainability,theymayseektodiversifyportfoliosawayfromJapanese

bondsandtowardassetsdenominatedinothercurrencies.Thus,short-terminterventionbycentralbanksmayhavealimitedortemporaryimpact.

USinflationeases

Inflation

easedinJulyintheUnitedStates,althoughit

remainedfarhigherthanitwaspriortothestartofthe

MiddleEastconflict.Ontheotherhand,core(underlying)inflationfelltoalevellastseenjustpriortotheconflict.Notsurprisingly,thislatestdataledtoadeclineininvestor

expectationsforatighteningofmonetarypolicy.Let’slookatthedetails:

InJuly,theconsumerpriceindexwasup3.4%fromayearearlier,downfrom3.5%inJune.Thiswasthelowest

inflationratesincethe3.3%raterecordedinMarch.In

February,justpriortothestartoftheMiddleEastconflict,theinflationratehadbeen2.4%.Also,inJuly,consumerpriceswereup0.1%fromthepreviousmonthafterhavingfallenby0.4%inJune.

Energypricesarethekey:InJuly,energypriceswereup14.7%fromayearearlieranddown1.5%fromthe

previousmonth.Theyear-to-yearincreasewasthelowestsinceMarch,reflectingtheeasingofcrude-oilprices

followingthetemporaryceasefireintheMiddleEast.

Meanwhile,thepriceofgasolineintheUnitedStateswasup24.6%inJulyversusayearearlieranddown2.9%fromthepreviousmonth.Thus,althougheventsintheMiddleEast

ledtosomeeasingofenergyprices,pricesremain

significantlyabovethelevelseenpriortothestartoftheconflict.

Whenvolatilefoodandenergypricesareexcluded,core

(underlying)priceswereup2.5%inJulyversusayearearlier—thesameasinFebruaryjustpriortotheconflict.Core

priceswereup0.2%fromthepreviousmonth.

Thebottomlineisthatinflationismostlyresponsivetoshiftsinoilprices.GiventhecurrentscenariointheMiddleEast,itisdifficulttopredictthepathofoilpricesand,consequently,difficulttopredictfutureinflation.Meanwhile,fluctuating

oilpriceshavehadabigimpactonthepricesofspecific

energy-intensiveproductsandservices.Forexample,inJuly,airlinefareswereup25.5%fromayearearlier.

Inaddition,thepriceofcomputersoftwareandaccessorieswasup21.2%,whichpartlyreflectedtheclosureofthe

StraitofHormuzandthesubsequentshortageof

commoditiesusedinproducingsemiconductors.Itlikelyalsoreflectedstrongdemandonthepartoftechnology

companiesthatarerollingoutdatacenters.

TheeasingofUSinflationcoincidedwithashiftin

expectationsaboutmonetarypolicy.Atthetimeofwriting,thefuturesmarket’simpliedprobabilityoftheFederal

Reservehikingitsbenchmarkinterestratenextmonthwas37.9%—downfrom48.4%adaybeforeand54.4%aweekbefore.Indeed,withinflationeasingandthejobmarket

weakening,theargumentforincreasingtheinterestrateisbecominglessstrong.Ontheotherhand,thefutures

market’simplied

probability

ofaratehikebeforetheendoftheyearis72.5%.Whiledownfromyesterdayandaweekago,thisstillindicatesthatinvestorsanticipateaneedto

tightenmonetarypolicyinthefaceofpersistenti