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Japan’s inflation slowed again in July, with core CPI (ex-fresh food) easing to 3.1% yoy from 3.3% yoy, slightly above expectations of 3.0% yoy. Headline CPI also dipped to 3.1% yoy. The moderation was driven in part by cooling rice prices, which rose 90.7% yoy after surging 100.2% yoy in June, alongside the reintroduction of energy subsidies. Together, these helped bring core inflation down from May’s 3.7% peak.

However, price pressures remain entrenched. Food inflation excluding fresh items actually quickened to 8.3% yoy from 8.2% yoy. Core-core CPI (ex-food and energy) stayed unchanged, elevated at 3.4%. Energy prices provided some relief with a -0.3% yoy annual decline, the first drop since March 2024, but this was not enough to counter stubborn underlying strength.

For policymakers at BoJ, the data paints a mixed picture: rice and energy are finally easing their grip on consumer prices, but persistently high core inflation highlights why interest rate hikes remain on the table. While inflation is clearly off its May peak, the road back toward the 2% target looks slow and uneven.

Chicago Fed President Austan Goolsbee struck a cautious tone, telling Bloomberg TV that while next month’s FOMC meeting is “live,” the recent pickup in services inflation has made him hesitant about supporting a rate cut.

He pointed to the latest CPI report, where services costs accelerated in a way “probably not driven by tariffs,” calling it a “dangerous data point” for Fed’s inflation fight.

In contrast, Boston Fed President Susan Collins signaled a greater willingness to cut rates soon, telling the Wall Street Journal she could back easing as early as September. Collins emphasized that higher tariffs could weigh on consumer purchasing power and ultimately weaken spending, while also warning that labor market risks are becoming more visible.

Collins acknowledged that she expects inflation to keep rising through the end of 2025 before easing again in 2026, but still viewed the risks to growth and employment as important factors that justify keeping the option of cuts on the table.

Cleveland Fed President Beth Hammack signaled little appetite for near-term easing, telling Yahoo Finance that if the FOMC were meeting tomorrow she “would not see a case for reducing interest rates.” She stressed that inflation has been “too high for the past four years” and it's been "trending in the wrong direction" currently, justifying a stance that remains “modestly restrictive.”

Hammack noted that the economy has so far shown resilience, with no significant signs of downturn that would warrant easier policy. Instead, she emphasized the Fed’s responsibility to ensure inflation expectations remain anchored, cautioning that premature cuts risk undermining that effort.

On tariffs, Hammack flagged that their effects are only beginning to filter through. Typically, it takes "three to four months" for the first signs to emerge, meaning the bulk of the impact will not be seen until 2026. She expects further pass-through of higher costs next year, adding another reason to proceed cautiously on easing.

Slow productivity growth is now recognised as not requiring tight monetary policy to keep demand in check. But what if tight monetary (and other) policies make productivity worse?

• Traditionally, economic theory has assumed that monetary policy is ‘neutral’ in the long run. That is, it can affect inflation, and short-run fluctuations in growth and the labour market but it has no implications for growth or unemployment in the long run. In Australia, the standard discourse also assumes that productivity growth is more or less fixed, or else determined by government policy. And until recently, it was assumed in many quarters that weak productivity growth meant that demand had to be constrained – by monetary and other policies – to match the weak growth in supply.
• What if we have it all backwards? A growing body of research suggests that tight monetary policy can in fact reduce long-run growth. One way this might happen is that by slowing demand, tight monetary policy reduces the incentive to invest, and thus the future capital stock and future productivity. This is on top of the ‘scarring’ effects on workers that we normally think of as long-run effects of recessions.
• We should not pick only on monetary policy here. Policies that reduce the incentive to invest in the right labour Skills and Smarts or labour-saving Stock of capital reduce future productivity growth. More broadly, we need to remember that Skills and Stocks are stocks, not flows. Short-run changes to the stock of something – whether a workforce, a capital stock or a housing stock – can have long-lasting effects on economic outcomes.

This week’s Productivity Roundtable (together with the pre-roundtable roundtables that preceded it) responds to growing concerns about slow growth in productivity and thus potential growth. There are many ways to boost potential growth: the Treasury ‘Three Ps’ of Population, Participation and Productivity. Recall that only the latter two unambiguously boost living standards, along with Price: what we get for what we sell to the world relative to how much we pay for the things we buy from the world. The recent downward revisions to the RBA’s assumptions about potential growth look to be equally split between a slowdown in trend growth in labour productivity (from 1.0%yr to 0.7%yr) and a slower rate of population growth (1.2%–1.3%) compared with the 1.5–1.6%yr rates typical in the years before the pandemic.

Recall also that labour productivity comes from labour Skills, the Stock of capital, and the Smarts involved in putting the two together (multifactor productivity). Any of the deeper drivers of productivity – be it the level of competition, regulation, technology or tax – work through one or more of these three aspects of productivity.

It has long been known that deep downturns stemming from wars and financial crises have long-running effects on future growth potential. Destruction of capital, or lack of funding for investment both weigh on the capital stock. This is on top of the long-recognised effects of deep downturns on the labour market – the ‘scarring’ effect of long-term unemployment, or of entering the labour market at the wrong moment.

More recently, it has been recognised that this kind of path dependence does not only apply to the deep downturns borne out of crisis. Some research finds that downswings in the business cycle more generally do not end with a strong cyclical bounce-back to the prior trend. It can be a slow grind, never quite getting back to the previous path.

A growing body of research (for example, here, here, here and here) also suggests that tight monetary policy affects potential growth and productivity. One way this can happen is by influencing investment decisions, which would add to the capital stock. While studies do not typically find that the level of interest rates helps predict investment directly, it does affect the level of demand. This in turn affects investment because there has to be a market for the output to make the investment worthwhile. A separate but related mechanism involves the re-allocation of capital to the most productive uses.

We can see, then, why an extended period of weak demand is so toxic: by discouraging current investment or shifts of capital into the most productive uses, it reduces the capacity to meet future demand. The fires of recession (and plain old soggy growth) are not cleansing – they are just destructive. Unfortunately, the same literature generally finds that loose monetary policy does not directly add to capacity in the long run, though a short-run boost to productivity from reallocation is implied by some models.

This is why the RBA’s pivot to no longer believing that weak productivity growth requires it to tamp down demand is so consequential – and so welcome. That change of heart avoids what could have become a significant policy error.

We should not only pick on monetary policy here. Other policies might also contribute to a low productivity growth malaise. Consider the skilled migration program. While it is widely admired as being targeted on skills shortages and effective in its operations, an issue arises where a skill shortage is defined to be any moment where you cannot find the right person at the current wage. If you can obtain an essentially infinite supply of people with the necessary skills from offshore at the current wage rate, why try to entice the local worker with a somewhat higher wage? And more to the point, why train local workers, or invest in labour-saving capital when you can always get someone from offshore at the current wage rate?

This suggests that it would help to set the bar for defining a skills shortage higher than the current wage rate. That would let local market forces take some of the adjustment. It would also ensure that firms sometimes have an incentive to invest in labour-saving technology – the Stock of capital – or better processes – the Smarts around how labour and capital combine.

The broader point here is that policy discussions need to allow for long-running consequences coming from things that are a stock – a quantity at a point in time like the number of workers with a particular skill, or the number of homes – rather than a flow, such as the amount of consumer spending in a quarter. The Stock of capital and the Skills of workers are stocks of this kind. The Smarts of the way we design our business processes are also long-lasting. Flows, by contrast, are inherently more ephemeral.

Getting things wrong with the stocks is far more consequential than the problems that many current policy proposals are designed to fix.

Gold prices have remained choppy this week with the precious metal remaining in the range between $3300-$3350/oz for the majority of the week. Two key levels which for now it appears buyers and sellers are defending ahead of the Jackson Hole Symposium and Geopolitical developments.

Strong US PMI Data Fails to Inspire Breakout

A strong PMI release may have just aided Fed Chair Jerome Powell. The S&P Global US Composite PMI rose to 55.4 in August 2025, up from 55.1 in July, showing growth for the 31st straight month, according to flash estimates.

This was also the fastest growth seen this year. The services sector continued to grow strongly, though activity slightly slowed from July’s peak (55.4 vs 55.7). Meanwhile, manufacturing bounced back, with the PMI rising to 53.3 from 49.8 in July, its highest level since May 2022.

Hiring picked up, with job creation hitting one of the fastest rates in three years. Businesses also reported the biggest backlog of unfinished work since May 2022.

Now all of this sounds like a solid economy and looking at the data more closely we see a few other interesting points.

S&P Global’s Chris Williamson noted the survey also showed mounting inflation pressures. Businesses are increasingly passing tariff-related costs through to consumers, and the PMI price indices are now running at their highest levels in three years. Selling prices for goods and services have moved higher, suggesting that consumer inflation will “rise further above the Fed’s 2% target in the coming months.

The PMI results create more uncertainty for the Fed. Instead of supporting the idea of immediate rate cuts, the data suggest the economy is closer to conditions that typically lead to rate hikes.

“With increased business activity, hiring, and rising prices shown in the survey, the PMI data lean more toward rate hikes than cuts,” Williamson explained.

The move did lead to an immediate bounce for the US Dollar Index which has since continued its advance. However as has been the case with Gold of late, the precious metal saw an immediate drop but has since recovered to a near daily high at $3345/oz.

This highlights the indecision in Gold at the moment with market participants likely keeping an eye on the Jackson Hole Symposium and Fed Chair Powell.

Jackson Hole and Gold Prices Moving Forward

Heading into Fed Chair Jerome Powell's speech at Jackson Hole tomorrow Gold appears in desperate need of a catalyst.

The Russia-Ukraine situation has a lot of variables to contend with before an actual peace deal may be agreed. Thus geopolitical risk premium is likely to remain in play in the near-term.

This leaves monetary policy, where like we discussed above today's PMI data has created more uncertainty for the Fed. The FED minutes also did not really provide anything new to the equation so will there be sparks tomorrow or will the market reaction be muted?

Technical Analysis - Gold (XAU/USD)

Technical analysis paints a nice picture for bulls though with a break of a bullish pennant pattern which was in play.

If you believe the old trading adage ‘technicals hint at what's to come from the fundamentals’ then the question is, are we getting a hint of a dovish speech by Fed Chair Powell tomorrow?

From a technical standpoint, Gold has broken the bullish pennant on the four-hour chart. A pullback and retest occurred today so Gold is on its way toward a potential target of $3383/oz.

There is significant resistance just ahead which Gold needs to overcome. The 50 and 100-day MA rest at 3343 and 3348 respectively and at this stage are providing a significant hurdle.

Supporting a bullish narrative is the period-14 RSI remains above the 50 level which hints that the momentum remains bullish.

Gold (XAU/USD) Daily Chart, August 21, 2025

Source: TradingView (click to enlarge)

Client Sentiment Data - XAU/USD

Looking at OANDA client sentiment data and market participants are Long on Gold with 70% of traders net-long. I prefer to take a contrarian view toward crowd sentiment and thus the fact that the majority of traders are net-long suggests that Gold prices could continue to slide in the near-term.

CADCHF: ⬆️ Buy

• CADCHF reversed from support level 0.5800
• Likely to rise to resistance level 0.5900

CADCHF currency pair recently reversed from the support area between the key support level 0.5800 (which has been reversing the price from June) and the lower daily Bollinger Band.

The upward reversal from this support zone created the daily Japanese candlesticks reversal pattern Piercing Line.

CADCHF currency pair can be expected to rise to the next resistance level 0.5900, which stopped the previous waves a and 2.

Brent Crude Oil: ⬆️ Buy

• Brent Crude Oil reversed from support area
•  Likely to rise to resistance level 68.00

Brent Crude Oil recently reversed from the support area between the support level 66.00 (which has been reversing the price from June) and the lower daily Bollinger Band.

The support level 66.00 was further strengthened by the intersecting 61.8% Fibonacci correction level of the previous impulse wave c.

Brent Crude Oil can be expected to rise to the next resistance level 68.00, which is the former strong support from July.

The British pound is down for a fourth straight day and has dropped 0.9% this week. In the North American session, GBP/USD is trading at 1.3432, down 0.16% on the day.

The UK was scheduled to release July retail sales on Friday, with a market estimate of 0.4%, but that has been delayed until September 5.

UK PMIs: services accelerates, manufacturing weakens

UK PMIs were a mixed bag in August. The Services PMI improved to 53.6, up from 51.8 in July and above the market estimate of 51.8. Business activity rose for a fourth straight month and hit its fastest pace in a year. There was an increase in new orders and business confidence rose on expectations that consumer demand will improve.

The manufacturing sector continues to struggle and the contraction worsened in August. The PMI fell to 47.3 in August from 48.0 in July. New orders decreased and employment losses deepened as the uncertainty over US tariffs has resulted in subdued global demand. The silver lining was that manufacturers' optimism improved.

Fed minutes points to split

The Federal Reserve released the minutes of the July meeting on Wednesday. The Fed didn't surprise anyone by maintaining rates but the meeting made headlines when two FOMC members voted against the majority in favor of a rate cut. This was the first time in over 30 years that more than one member has voted against a rate decision.

The minutes noted the differing views on the Fed's dual mandate of inflation and employment. The economy faces an upside risk to inflation and a downside risk to employment, complicating rate decisions. At the meeting, the majority judged higher inflation as the greater risk while the minority believed that the deterioration in the labour market was the greater risk.

The Fed is expected to lower rates in September for the first time since December 2024, with an 80% probability of a quarter-point cut according to CME's FedWatch.

GBP/USD Technical

• GBPUSD is testing support at 1.3431. Below, there is support at 1.3416
• There is resistance at 1.3457 and 1.3472

GBPUSD 4-Hour Chart, Aug. 21, 2025

The Japanese yen is slightly lower on Thursday. In the European session, USD/JPY is trading at 147.87, up 0.39% on the day.

Japan's inflation expected to continue slowing

Japan releases the July inflation report on Friday. The markets will be especially interested in the core rate, which is expected to ease to 3.0% y/y, from 3.3% in June. Core CPI includes energy but excludes fresh food

Core CPI has remained above the Bank of Japan's 2% target for over three years but the central bank has been slow to raise interest rates. BoJ Governor Ueda has said that the Bank will not raise rates until underlying inflation, which is generated by domestic demand and wages, is sustainably at 2%.

The BoJ raised rates to 0.5% in January but took its foot off the rate-hike pedal when Donald Trump became President and imposed a hard-hitting tariff policy which shook up the financial markets. Now that the US and Japan have reached a trade agreement and greatly reduced the uncertainty over tariffs, a major obstacle to raising rates has been removed.

Fed minutes point to dissension

The Federal Reserve released the minutes of the July meeting on Wednesday. The Fed's decision at the meeting to maintain rates was widely expected but the meeting made headlines when two FOMC members went against the majority and voted for a rate cut. This was the first time in over 30 years that more than one member voted against a rate decision.

The minutes reflected this dissension, noting the differing views on the Fed's dual mandate of inflation and employment. The economy faces an upside risk to inflation and a downside risk to employment, complicating rate decisions. At the meeting, the majority judged higher inflation as the greater risk while the minority believed that the deterioration in the labour market was the greater risk.

The Fed is widely expected to lower rates in September, after holding rates since December 2024.

USD/JPY

• USD/JPY has pushed above resistance at 147.33 and is testing 147.79 Above, there is resistance at 148.28
• 146.84 and 146.38 are providing support

USDJPY 1-Day Chart, Aug. 21, 2025