US Inflation: Inflation remains above target, but leading indicators are rolling over

The balance of inflation data is mixed. We interpret this to mean that the Fed’s room to act is constrained. It will be hard for the Fed to justify multiple cuts next year, but the data also does not suggest a renewed hiking cycle.

Our US inflation leading indicators for both core and headline CPI have rolled over, but the 6m-forward point estimates remain above the Fed’s inflation target at >3% annualized.

Alongside our US growth LEI running at 2% annualized, this implies >5% nominal GDP. This is a healthy rate of growth that would normally NOT warrant the market to price in another 4 Fed cuts over the next year and a terminal rate of 3% by 4Q26.

It should also be noted that reported inflation breadth has ticked up again to its highest level since 2021. Inflation surprises are also starting to mean-revert higher from very negative levels amid the first signs of tariff pass-through we highlighted last month (link).

To track potential second wave risk next year, we are watching the “higher prices” sub-component of the ISM surveys. So far, intentions to raise prices have been rolling over, implying second wave risks have not materialized yet.