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Japan's Economy Minister Minoru Kiuchi struck a more measured tone on inflation than the Bank of Japan, suggesting the recent surge in energy prices has yet to generate broad-based consumer price pressures. Speaking at a press conference on Tuesday, Kiuchi said the pass-through from the Middle East conflict has so far remained limited, noting that "the overall consumer price index rose 1.7% year-on-year in June, showing only moderate rises." His remarks contrasted with the BoJ's warning last week that inflation risks could overshoot its 2% target.

Kiuchi acknowledged that inflationary pressures could build in the months ahead, saying policymakers "do need to be vigilant to the possibility that costs could be gradually passed onto food and other consumer goods from summer through autumn." Still, he emphasized that households should be better placed to absorb higher prices, forecasting average real wages to rise by nearly 1% in the current fiscal year while pointing to government fuel subsidies as an important buffer against higher living costs.

While avoiding direct criticism of the BoJ, Kiuchi's comments appeared to temper market expectations for a more aggressive policy response. He said he hoped the central bank would "continue to guide appropriate policy to stably and sustainably achieve its 2% inflation target," language consistent with his long-standing preference for accommodative monetary settings. The remarks suggest the government remains more comfortable with a gradual approach to policy normalization even after the BoJ raised interest rates to 1% in June.

Key Takeaways

• Japan's Economy Minister Minoru Kiuchi offered a more measured assessment of inflation than the BoJ, saying June's 1.7% CPI increase still represented only "moderate" price rises.
• While acknowledging that higher energy costs could gradually feed into food and consumer goods prices, Kiuchi stressed that cost pass-through from the Middle East conflict has so far remained limited.
• Kiuchi expects real wages to rise by nearly 1% this fiscal year and highlighted government fuel subsidies as an important buffer against higher living costs.
• His remarks contrasted with the BoJ's stronger warning last week that inflation could overshoot its 2% target, suggesting the government sees less urgency for further monetary tightening.
• Although Kiuchi reiterated support for the BoJ achieving its inflation target, his comments reinforced the government's preference for a gradual and cautious normalization of monetary policy.

US manufacturing gathered further momentum in July, with the ISM Manufacturing PMI rising to 55.6 from 53.3, its highest reading since May 2022 and well above market expectations. According to ISM, the latest reading is historically consistent with annualized real GDP growth of around 2.8%, reinforcing signs that the US economy entered the third quarter on a solid footing despite elevated interest rates and geopolitical uncertainty.

The improvement was broad-based, led by a sharp acceleration in production. The Production Index jumped 6.3 points to 58.5, its highest level in almost five years, extending expansion to a ninth consecutive month. The labor market also showed renewed strength, with the Employment Index climbing to 52.8 from 49.7, returning to expansion territory for the first time in 33 months and reaching its highest level since August 2022. Together with stronger new orders and export demand, the survey points to improving manufacturing activity rather than a temporary rebound.

Inflation pressures, however, remained an important feature of the report. Although the Prices Index eased to 71.1 from 73.0, it remained firmly elevated. ISM said price increases continued to be driven by higher steel and aluminum costs, tariffs on imported goods and rising petroleum-based product prices linked to the Middle East conflict. Just over half of respondents reported paying higher prices in July, down from June but still indicative of widespread cost pressures across the manufacturing sector.

The report strengthens the case that the US economy remains resilient while inflation risks have yet to disappear. For the Federal Reserve, the combination of stronger production, expanding employment and still-elevated input prices leaves the door open to another rate hike should inflation remain stubborn.

Economic Data

Key Takeaways

• ISM Manufacturing PMI jumped from 53.3 to 55.6, the highest reading since May 2022, pointing to a further acceleration in US factory activity.
• ISM estimates the July PMI is historically consistent with 2.8% annualized real GDP growth, suggesting manufacturing continues to support overall economic expansion.
• Production surged from 52.2 to 58.5, its highest level in nearly five years, while the Employment Index returned to expansion at 52.8, its first expansionary reading in 33 months.
• Demand remained healthy, with New Orders rising to 56.7, New Export Orders returning to expansion at 53.0, and Backlog of Orders climbing to 55.0, indicating factories continue to receive more work than they can immediately process.
• Inflation pressures eased only modestly. Prices Paid fell from 73.0 to 71.1 but remained elevated, with respondents continuing to cite tariffs, higher steel and aluminum prices, and Middle East-related energy costs as key drivers.
• Overall, the report portrays an economy with strong manufacturing momentum and persistent inflationary pressures, giving the Fed greater flexibility to tighten policy if upcoming inflation data fail to improve.

Full US ISM Manufacturing release here.

New York Fed President John Williams said he remains confident inflation will gradually resume its decline, arguing that the recent surge in energy prices is unlikely to derail the broader disinflation process. Speaking to Reuters on Friday, Williams said that if energy prices and tariffs have peaked and the economy remains resilient, "some of the big drivers that pushed up inflation... will not be at play as much," while "some of the disinflationary forces that we've been seeing should reassert themselves." He added that his personal forecast is for inflation to ease during the second half of this year and decline further next year.

Rather than focusing on temporary supply shocks, Williams emphasized that the Fed is watching whether underlying inflation is returning sustainably toward target. "I am... focused quite a bit on what are we seeing in the core inflation data over the next several months," he said, adding that policymakers need evidence inflation is on "a disinflationary path consistent with us achieving our 2% inflation goal on a sustained basis by 2028." Williams reiterated that the current policy stance is "well positioned" following last week's decision to leave the federal funds target range unchanged at 3.50%-3.75%.

Still, Williams made clear that the Fed remains prepared to tighten policy again if inflation fails to cooperate. "If the economy is not on a trajectory that will bring inflation back down to 2%... it would absolutely be appropriate to act," he said. While acknowledging uncertainty surrounding the Middle East conflict, Williams said he does not expect it to generate persistent inflationary pressure under his base case, assuming shipping disruptions eventually ease. He also stressed that the Fed will make its own policy assessment rather than follow financial market pricing, saying it would "absolutely not" be bound by investors' expectations.

Key Takeaways

• Williams remains confident that inflation will continue to ease, expecting disinflationary forces to reassert themselves if energy prices and tariffs stabilize.
• The Fed's primary focus has shifted to core inflation, with Williams emphasizing that the next several months of underlying inflation data will determine whether inflation is on a sustainable path back to the 2% target.
• He reaffirmed that current monetary policy is "well positioned" after last week's decision to leave rates unchanged at 3.50%-3.75%.
• Despite his constructive inflation outlook, Williams made clear that further rate hikes remain on the table if inflation fails to move convincingly toward target.
• Williams views the inflation impact of the Middle East conflict as likely temporary under his base case, assuming shipping disruptions eventually ease.
• He also stressed that the Fed will not be guided by market pricing, reiterating that policy decisions will be based on the Fed's own assessment of incoming economic data.