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Even with strong capex, US nonfinancial corporations are generating more cash than they are investing

Sandy Batten

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Import prices increased 0.7% m/m (7.0% y/y) in August after a revised 0.3% m/m decline in July (previously -0.4% m/m). The Action Economics Forecast Survey looked for a 0.1% m/m decline. Export prices increased 0.6% m/m (8.6% y/y) in August following monthly declines in both June and July. The Action Economics Survey expected a 0.5% m/m decline. Note that import and export price indexes are not directly affected by tariffs because they measure the prices of goods before taxes. Tariffs are classified as taxes and therefore are excluded from these calculations.

Declines in petroleum prices led to monthly declines in the overall import and export prices in both June and July. However, petroleum prices edged up 0.1% m/m in August. Import prices excluding petroleum jumped 0.8% m/m (5.5% y/y) in August, the largest monthly increase in four months and the highest y/y rate since May 2022. Higher prices for nonfuel industrial supplies and materials (2.0% m/m, the largest monthly increase since February), capital goods (0.9% m/m) and consumer goods excluding automotives (0.5% m/m) drove the increase in August.

Agricultural export prices rose 0.5% m/m (5.8% y/y) in August while nonagricultural export prices jumped 0.7% m/m (8.9% y/y), the first monthly increase in three months. Agricultural export prices have not declined on a monthly basis since December 2025. Higher prices for corn and animal feeds more than offset lower prices for meat. Nonagricultural export prices had fallen in both June and July, aided by falling petroleum prices. Higher prices for nonagricultural industrial supplies and materials (1.4% m/m after declines in both June and July), capital goods (0.2% m/m) and automotive vehicles, parts, and engines (0.3% m/m) drove the increase.

These import and export price series are not seasonally adjusted; they can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Counter to market expectations for small declines, both import and export prices rose meaningfully in August.
- Import prices increased 0.7% m/m while export prices rose 0.6% m/m. Both had fallen in June and July, helped by falling petroleum prices.
- Petroleum prices edged up 0.1% m/m in August.
- Price increases were relatively widespread across end-use categories.

U.S. Import and Export Prices Jump in August

Kathleen Stephansen, CBE

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Mortgage applications fell 4.1% w/w (-40.2% y/y) in the week ending September 11, after declining 2.7% w/w (-19.2% y/y) in the week ending September 4, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house fell 0.8% w/w (-10.2% y/y) in the latest week, after edging down 0.2% w/w (-6.9% y/y) in the September 4 week. Applications for loan refinancing fell 8.8% w/w (-60.7% y/y) in the September 11 week following a decline of 6.2% w/w (-32.1% y/y) in the September 4 week.

The effective interest rate on a 30-year fixed-rate loan rose 13bps to 7.18% in the week ending September 11 from 7.05% in the week ending September 4, reaching its highest level since late January 2025. The rate on 15-year fixed-rate mortgages rose 15bps to 6.55% in the September 11 week from 6.40% in the September 4 week. The 30-year Jumbo rate rose 27bps to 7.20% in the latest week from 6.93% in the September 4 week. The rate on a 5-year ARM soared 46bps to 6.59% in the September 11 week from 6.13% in the September 4 week.

The share of applications for refinancing an existing loan fell to 39.4% of total applications in the week of September 11 from 40.9% in the week ending September 4. The adjustable-rate mortgage (ARM) share of activity fell to 8.4% in the latest week from 8.5% in the September 4 week.

The average size of a mortgage fell 0.5% w/w (-16.3% y/y) to $378,400 in the week ending September 11, after rising 2.1% w/w (-5.2% y/y) to $380,200 in the week ending September 4. The average size of a purchase loan declined 0.7% w/w to $442,500 in the September 11 week after rising 1.5% w/w to $445,600 in the September 4 week. The average size of a loan to refinance a mortgage fell 2.1% w/w to $279,800 in the week ending September 11 after rising 2.1% w/w to $285,800 in the September 4 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Applications for loans to purchase a house and applications for loan refinancing both declined in the latest week.
- Interest rate on 30-year fixed-rate loans rose 13bp to 7.18%.
- Average loan size fell moderately in the September 11 week.

U.S. Mortgage Applications Declined in the September 11 Week

Winnie Tapasanun

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The Empire State Manufacturing Index of General Business Conditions fell sharply to a lower-than-expected 7.6 in September following a 5.0-point increase to 20.6 in August, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of 14.1 for September had been expected in the Action Economics Forecast Survey. The positive September figure indicated that business activity in New York State expanded for the sixth straight month but at the slowest pace since June and well below August’s level (the highest since December 2021). Nevertheless, it was a sharp improvement from -7.0 in September 2025 and a low of -29.7 in January 2024. The percentage of respondents reporting an increase in general business conditions was 33.9% in September, down from 43.8% in August; the percentage reporting a decrease was 26.3%, up from August’s 23.1%. The latest survey was conducted between September 2 and September 10.

The headline index reflects the answer to a single question concerning the state of economic activity and is not calculated from the components. Haver Analytics calculates a composite index from the five major components, which is comparable to the ISM manufacturing index. This calculated index eased to 53.7 in September following a 2.1-point decline to 55.4 in August, representing the ninth consecutive expansion but at the slowest pace in three months; it was up from 46.1 in September 2025 and well above a low of 43.0 in January 2024. The index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories, with equal weights (20% each).

In the latest survey, the new orders index fell to 2.0 in September after a 4.9-point decrease to 17.3 in August, marking the weakest of nine successive months of expansion; it was a sharp improvement from a low of -30.7 in January 2024 but a drop from a high of 19.6 in April 2023. The shipments index plunged to -3.2 in September following a 12.7-point fall to 11.7 in August, representing the first negative shipments reading since March; it was well above a low of -21.7 in April 2024 but below a high of 21.0 in June 2023. The unfilled orders index fell to 5.9 in September after a 10.5-point jump to 15.5 in August, indicating unfilled orders expanded for the eighth straight month but at a slower pace; the index reached a low of -24.2 in January 2024. The inventories index rebounded to 8.9 in September following a 9.2-point slide to -5.2 in August, signaling inventory growth at the strongest rate since May. Meanwhile, the delivery times index slipped to 18.8 in September from 20.6 in August (the highest reading since April 2022), with 25.7% of respondents reporting longer delivery times and 6.9% reporting shorter times, indicating that delivery times continued to lengthen.

On the labor front, the number of employees index rose to 10.6 in September after a 2.1-point decline to 9.3 in August, indicating employment expanded for the eighth straight month. The index remained well above a low of -9.3 in December 2023 but below a peak of 24.9 in February 2022. In September, 19.0% of respondents reported an increase in employment while 8.4% reported a decline. The average workweek index jumped to 17.0 in September from 6.9 in August, remaining positive for the eighth month running and at the strongest level since November 2021.

Inflation pressures remained elevated in September. The prices paid index advanced to 63.1 in September, the highest level since July 2022, after a 6.3-point rise to 58.6 in August. The index was above a low of 25.9 in December 2024 and a low of 19.9 in July 2023, albeit remaining well below a peak of 84.9 in April 2022. In September, 63.7% of respondents reported higher prices paid while only 0.6% reported lower prices paid. The prices received index increased to 28.1 in September, a three-month high, from 22.7 in August. The index was above a low of 7.5 in December 2024 and a low of 7.7 in July 2023 but far below a high of 51.9 in March 2022. In September, 30.6% of respondents reported higher prices received while 2.6% reported lower prices received.

Firms remained optimistic about the future business outlook in the latest survey. The index for future business conditions eased to 29.0 in September, the 17th straight month of positive readings, after a 4.2-point gain to 32.1 in August, with 50.5% of respondents expecting business conditions to improve over the next six months. Future new orders pulled back to 25.3 in September, the lowest level since April, from 37.1 in August; future shipments slid to 25.5, a five-month low, from 33.7. Growth in future employment decelerated to 20.0 in September from 28.2 in August (the strongest reading since March 2022). Capital spending plans remained positive for the 11th consecutive month in September, with the future capital expenditures index easing to 14.9, a three-month low, from August’s 16.5. Expected prices paid climbed to 67.3 in September, the highest level since June 2022, from 57.7 in August, while expected prices received declined to 42.3 from 48.7.

The indexes in this report are diffusion indexes and measure the percentage of respondents indicating an increase minus the percentage indicating a decrease with zero separating expansion from contraction.

The New York Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

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- General Business Conditions Index down 13.0 pts. to 7.6 in Sept.; sixth straight expansion.
- New orders (2.0), down 15.3 pts.; weakest level since Dec. ’25, still indicating expansion.
- Shipments (-3.2), down 14.9 pts.; first negative reading since March.
- Unfilled orders (5.9), down 9.6 pts. but staying positive; inventories (8.9), highest since May.
- Employment (10.6), up 1.3 pts.; eighth consecutive expansion.
- Prices paid (63.1), highest since July '22; prices received (28.1), a three-month high.
- Firms still optimistic: Future Business Conditions Index down to a still-expansionary 29.0; future prices paid rising to 67.3, highest since June ’22.

U.S. Empire State Manufacturing Index Cools Sharply in September

Robert Brusca

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The ZEW financial experts in September see broadly improving **macroeconomic conditions** in the euro area, Germany, the United States, and China. There are step-ups in each of these areas, mostly by modest increases of four to seven points month-to-month. However, Germany shows a month-to-month increase of 14 points, the largest gain of the group. The percentile standings of the readings show an above-median (which means an above 50th percentile reading) for the euro area at a 59.8 percentile and for China at a 77.3 percentile. Both Germany and the U.S. lag their medians, with Germany at a 38.9 percentile standing and the U.S. at a 44.5 percentile standing.

**Economic expectations** are little changed and mixed among the three countries: Germany, the U.S., and China. The U.S. sees a slight setback as its monthly reading falls by 3.2 points; German expectations edge up by 0.5; China’s reading falls by 4.1 points. Only the reading for Germany stands above its 50th percentile, at the 59th percentile standing.

**Inflation expectations** are probably the big story this month, with big changes in all the reporting units of over 20 points on the month and all of them jumping up well over their median estimates, with rankings ranging from a 52.3 percentile standing in the U.S. to an 81.8 percentile standing in China. The outlook for inflation has suddenly worsened largely on events in the Middle East, rising oil prices, and increased pessimism about prospects for peace in the Middle East anytime soon.

Because of this **short-term interest rate expectations** are also higher, rising by 39 points in the U.S., 19 points in the euro area, and over 13 points in China month-to-month. All the readings for short-term rate expectations are above their medians, well above their respective 50th percentiles, with standings ranging from a low of the 71st percentile for the U.S. to the mid-80th percentile for both the euro area and China.

There are smaller increases, although increases in each of the areas, for **long-term interest rate expectations**, with the largest increases for the U.S. at 11.5 points on the month, whereas Germany and China log increases of about 3.8 to 3.9 points. Percentile standings show that long-term rate expectations are only above the 50th percentile standing for China, whereas for Germany they are at the 37th percentile. For the U.S., they are at the 44th percentile. Though the sharp increase in inflation expectations seems to have caught short-term interest rates off guard, longer-term interest rates have followed suit with only relatively small adjustments, not jumping to draconian levels, at least not yet. This would suggest that, with the rise in short-term expectations, financial experts think that central banks are still in control of inflation developments. That’s good news.

Not surprisingly, against this background **stock market expectations** deteriorated in each region. The smallest decline was in Germany, a decline of 4.4 points, while the largest was in China, a decline of 11.8 points. Germany is the only area where the stock assessments are below their 50th percentile. The euro area just makes the 50th percentile mark at 50.5. The U.S. comes in at a 58.3 percentile, while China has a 62.1 percentile standing assessment for the month. Generally speaking, the acceleration of inflation expectations has created some setback on stocks but hasn't had a draconian impact there either.

**The outlook** is that the economic situation has improved slightly in the month and economic expectations have a mixed performance and are generally slightly subpar. Inflation expectations jump sharply and have had a big impact on short-term rates, a more moderate impact on long-term rates, and a modest impact on stock values. Because of the sharp one-month rise in inflation expectations, we're going to want to watch these developments very closely.

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ZEW Current Situation Improves; Inflation Expectations Jump!

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Japan’s industrial production rose in July largely on a jump in gas & electric utilities output. But manufacturing IP made a small move backward, with output falling by 0.1% month-to-month. Consumer goods output did turn sharply lower in July, dropping by 1.3% month-to-month, but intermediate goods output advanced by 0.2% as capital goods output continued to gear up, rising 3.2% month-to-month after rising 5.5% month-to-month in June. These gains in capital goods output followed a 3.1% drop in May.

Overall industrial output sequential gains show an accelerating output trend. The 12-month gain is 3.6%, the six-month annualized gain is nearly identical at 3.5%, and the three-month annualized gain is at a hefty 9.7%.

Sequential trends in manufacturing show more fluctuations and less of an arrow-straight trend. For manufacturing, 12-month growth is 4%, while three-month annualized growth is 8%. There is a lull in between, with six-month growth showing a 0.2% annual rate decline. Manufacturing sectors generally show a similar pattern, with solid 12-month growth, weaker growth over six months, and a pick-up over three months, with the three-month pace rebounding and turning sharply stronger than its 12-month pace.  We see that for intermediate goods and capital goods, with only consumer goods showing steady output deterioration from 12 months to six months to three months. Yet, as the graphic shows, retail sales are holding up and tracking with industrial output gains overall.

On a quarter-to-date basis, very early in Q3, output is rising at a 12.3% annualized rate over its Q2 level. Manufacturing output is up at a 7.6% pace. Consumer goods output is a drag, with output falling at a 5.1% annual rate, offset by a 5.4% gain in intermediate goods and capital goods output exploding at a 40.1% annual gain. Utilities & mining output also are rising clearly and strongly in the quarter.

However, Japan’s economy is still in recovery mode. As the table clearly shows, all IP measures are lower than they were one year ago. The economy is still digging out after retrenchment. Moreover, output is still broadly weaker than it was in January 2020 before COVID struck. That’s a long time for output to not have risen, 6½ years. On that comparison, only investment goods output and electric & gas utilities output are higher in July of this year than in January 2020, and in both cases it is by less than 2%.

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Japan is having an output revival. It looks real. The weakening of the yen may have given it a tailwind. Now the yen is stabilizing and gaining back some of that loss, but I do not look for yen appreciation to run far or fast.

For now, Japan manufacturing is reviving, and this is clear in the IP report as well as in the PMI surveys. The economy watchers don’t quite seem to see it yet. But motor vehicle production is back in gear, and the leading economic index is showing solid upward momentum. Japan, much like the U.S., is showing better industrial revival statistics than consumer confidence readings, which continue to lag. Income growth in Japan shows solid performance, and asset valuations are high, but consumers are not eager to spend, or so they tell surveys. Consumers also give their overall livelihood assessment a poor score. Still, consumers manage to spend enough to keep retail sales advancing after some significant retrenchment in 2025. Japan’s economy, like the U.S., seems to still be expanding and not under any real threat despite its irregularities.

Japan

Japan’s IP Shows Developing, Solid Uptrend

Tian Yong Woon

In this week's Letter, we examine the divergences running through Asia's inflation, monetary policy and currency performance. Headline CPI inflation has risen across much of the region, driven in large part by the closure of the Strait of Hormuz. Underlying dynamics nonetheless remain disparate, with China recording the region's lowest inflation rates and India facing renewed food and oil pressures (chart 1). China warrants closer attention still, since its producer price inflation now runs far ahead of consumer inflation (chart 2). Weak passthrough to domestic prices, soft demand and Beijing's campaign against destructive price competition all help explain that gap. Disparate inflation outcomes, in turn, are feeding divergent monetary policy stances, though that divergence has narrowed somewhat (chart 3). India has paused its rate cuts, while the Bank of Japan continues its gradual normalisation. Japan also sits at the centre of a protracted rise in yields, shared with its major-economy peers. A decomposition suggests real yields, rather than breakevens, have been the greater driver, amid concerns about fiscal policy and capex (chart 4). Divergence runs through currency performance too, with relative standings shifting repeatedly on a trade-weighted basis (chart 5). The Indian rupee has been the worst performer year-to-date, only recently ceding that position to the Philippine peso. At the other end of the table, the Chinese yuan has been dethroned by a resurgent South Korean won. Strong AI-driven export inflows had long been offset there by persistent portfolio outflows.

**Inflation divergence**
Headline CPI inflation has risen across much of Asia this year, on many measures. Surging energy prices, driven by the continued closure of the Strait of Hormuz, account for a large part of that rise. Underlying inflation dynamics within the region, however, remain quite disparate from one economy to the next. External forces such as oil prices and supply shocks are only part of the story. Domestic conditions matter too, notably the strength of domestic demand and each economy's dependence on imported goods, which is another way of describing its degree of self-sufficiency. China illustrates the point, with inflation still short of breaking conclusively above the low to no inflation region. That owes arguably in part to domestic demand conditions, which remain comparatively weak. It has once again logged the region's lowest inflation rates in recent months, reclaiming that spot from Thailand (chart 1). India sits at the other end, having ceded the top spot for headline CPI inflation to the likes of Vietnam and the Philippines since early 2025. Its recent resurgence in consumer inflation nonetheless points to a dependence on imported oil. Fresh risks have also emerged more recently from food and agricultural shocks, tied to ongoing and possibly worsening El Niño effects.

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China merits a closer look, with producer price inflation now running far above consumer price inflation (chart 2). Producer price inflation has staged a resurgence after a protracted stretch of deflation. Consumer inflation, however, improved only briefly before recent readings slipped back towards the low to no inflation region. Several factors lie behind the producer price pickup, starting with low base effects from prior periods. Rising energy costs have added to it, as has surging demand in certain sectors, such as tech and AI-related goods. Some passthrough to export prices is evident, but passthrough to domestic prices has been weak. That weakness owes in part to soft domestic demand and may be eating into margins, leaving producer price inflation running well ahead of consumer inflation. This ties into the two-speed dynamic in China's economy, where externally facing sectors continue to outgrow more domestically oriented ones. Looking further out, the authorities' clampdown on excessive producer price wars, termed "involution", may push producer prices higher still.

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**Monetary policy divergence**
Monetary policy stances remain divergent across Asian economies, although that divergence has narrowed somewhat. A shared impetus to hold or tighten on inflation risks accounts for much of that narrowing. Take India, which until recently had the highest main policy rate among major Asian economies (chart 3). It had nonetheless been easing for a time, until protracted currency weakness and resurgent inflation arguably led the central bank to pause its rate cuts. The Bank of Japan, by contrast, has long been pursuing gradual policy normalisation, given its delayed exit from the prior era of easy monetary policy. Prior yen weakness and still-wide interest rate differentials with major peers have also lent credence to its tightening bias.

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Japan has drawn attention in recent weeks for its protracted surge in yields, alongside its major economy peers. Chart 4 decomposes that increase into real and breakeven inflation components, arguably pointing to the former as the greater driver. Inflationary risks, granted, remain live and potentially the more potent of the two. Japanese real yields have nonetheless surged considerably in their own right. That would not be the case were the recent move in nominal yields driven by non-real aspects alone. Instead, investor concerns or expectations of higher real yields are possibly at work. An expected large upcoming fiscal bill and intense capex spending sit among the likely drivers. Eyes now turn to the Bank of Japan's meeting this week for further cues, with a 25 bps rate hike expected.

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**Currency divergence**
We turn now to divergences in Asia's currency performance and the recent drivers behind them. On a trade-weighted basis, relative standings have shifted repeatedly through the course of this year (chart 5). At the bottom of the table sits the Indian rupee, the worst-performing Asian currency year-to-date. Capital outflows have weighed on it, as has a hefty oil bill reflecting India's heavy import dependence. Only recently has the Philippine peso taken over from it as the prime laggard. The top of the table has proved similarly unsettled. The Chinese yuan held the leading spot for much of the year so far, before being dethroned by the South Korean won. That marks a spectacular turnaround for the won, from briefly being this year's worst performer to its best. It is a reversal worth dwelling on, and we take it up in the next segment.

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That reversal is worth unpacking, since the won had been on the back foot for some time beforehand. Exports growth through the year has been high and accelerating, driven mainly by AI-related goods. Those persistent and strong current account inflows nonetheless did little to prop up the currency. Working against them were portfolio outflows from South Korea, which ran persistently in the opposite direction. It was only recently, against that backdrop, that the won staged its turnaround. Behind it sits South Korea's building domestic growth story, alongside back-to-back rate hikes by the Bank of Korea. Whether this currency recovery still has legs is another question.

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Asia

Economic Letter from Asia: Same Shocks, Different Paths

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The Consumer Price Index advanced 0.4% in August after a 0.1% increase in July (unrevised) and a 0.4% decline in June (unrevised), according to the Bureau of Labor Statistics. The August rise matched the forecast in the Action Economics Forecast Survey. The y/y rate held steady at an elevated 3.4% in August (2.9% in August 2025). The CPI excluding food & energy rose a slightly more-than-expected 0.3% in August after a 0.2% rise in July and no change in June. A 0.2% increase had been expected. The y/y rate eased to 2.4%, the lowest since March 2021, from July’s 2.5%. The three-month rate for the headline CPI eased to 0.2% annualized in August from 0.5% in July, while the three-month rate for the core CPI accelerated to 2.0% from July’s 1.6%.

Combined with the stronger-than-expected employment report released on September 4 and the PPI data released yesterday (0.4% m/m; 5.4% y/y for the headline August PPI), today’s CPI report reinforces expectations of a 25bps Fed rate increase at the September 15-16 FOMC meeting. The fed funds futures market is currently pricing in an 86.5% probability of a 25bps rate hike versus 69.4% just before the CPI release.

Energy prices jumped 2.1% in August, the first m/m rise in three months, reversing a 1.5% decline in July. The y/y rate accelerated to 16.3%, the highest since May, from July’s 14.7%. The m/m increase reflected price rebounds of 10.1% (52.0% y/y) in fuel oil and 3.9% (27.4% y/y) in gasoline. In contrast, natural gas prices fell 1.1% (+4.4% y/y) in August following two successive m/m gains, and electricity costs slipped 0.2% (+3.8% y/y), the second m/m decrease in three months.

Food prices edged up 0.1% (2.7% y/y) in August, the fifth straight m/m increase, after a 0.1% uptick in July. Food-at-home prices were essentially unchanged (+2.2% y/y) following a 0.1% July dip. Within this category, prices of dairy & related products (+0.3%; -0.3% y/y), nonalcoholic beverages & beverage materials (+0.2%; +3.7% y/y), meats, poultry, fish & eggs (+0.1%; +1.1% y/y), and other food at home (+0.1%; +2.4% y/y) increased m/m in August, while prices of fruits & vegetables slid 0.4% (+3.2% y/y), the third consecutive m/m slide, and cereals and bakery products held steady (+2.6% y/y) following a 0.2% July rise. Meanwhile, food-away-from-home prices rose 0.3% (3.4% y/y) in August after rising at the same rate in July.

Goods prices less food & energy inched up 0.1% (0.7% y/y) in August after a 0.2% rebound in July. The m/m increase reflected price gains of 0.6% (6.3% y/y) in tobacco & smoking products, 0.4% (-2.3% y/y) in used cars & trucks, 0.3% (0.6% y/y) in new vehicles, and 0.1% (1.6% y/y) in alcoholic beverages. Prices of medical care commodities, however, fell 0.2% in August (-2.7% y/y), the sixth straight m/m fall; apparel prices held steady (+3.6% y/y).

Services prices less energy rose 0.3% in August on top of a 0.2% rise in July, with the y/y rate steady at 3.0%. Shelter prices grew 0.3% (3.0% y/y) in August after a 0.1% increase (3.2% y/y) in July, reflecting price gains of 2.4% (3.2% y/y) in lodging away from home, 0.2% (2.7% y/y) in rent of primary residence, and 0.2% (3.1% y/y) in owners' equivalent rent of residences. Transportation costs climbed 0.5% (2.4% y/y) in August after a 0.3% recovery in July, while medical care services prices were down 0.2% (+2.5% y/y), the second m/m decline in three months.

Notably, the CPI excluding food, shelter, and energy increased 0.3% in August after a 0.3% rebound in July. The y/y rate ticked up to 2.0% from July’s 1.9%.

Significantly, the closely watched supercore inflation measure—CPI services excluding energy services, rent of primary residence & owners' equivalent rent—rose 0.5% in August, the ninth m/m rise in 10 months, following a 0.2% rebound in July. The y/y rate quickened to 3.0% from July’s 2.8%.

The Consumer Price figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Monthly gains in headline CPI (0.4%) & core CPI (0.3%) advance.
- Year-over-year rates unchanged for headline CPI (3.4%) and slightly down for core CPI (2.4%), both remaining above the Fed’s target.
- Energy prices up 2.1% m/m, w/ the y/y rate accelerating to 16.3%, highest since May.
- Services prices up 0.3% m/m, w/ the y/y rate steady at 3.0%.
- Shelter prices up 0.3% m/m, w/ the y/y rate easing to 3.0% from 3.2%.
- Supercore CPI up 0.5%, w/ the y/y rate accelerating to 3.0% from 2.8%.

U.S. Consumer Price Inflation Steady in August at 3.4% Y/Y

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**One thing is clear: it is not a deflationary world**
Japan's PPI headline cooled in August, rising by only 0.1%. However, the headline for the all-manufacturing PPI rose by 0.3%, indicating more pressure.

Sequential inflation pressures for Japan’s overall PPI show a 7.6% gain over 12 months, accelerating to 12.7% at an annual rate over six months, and calming to a still-hot 4.5% over three months. For all-manufacturing, the 12-month gain is 7.7%, the six-month pace annualized is 12.4%, and the three-month pace annualized is 4.6%. These sequential results are very similar for these two series. Despite a substantial deceleration in place from 12 months to three months, the three-month pace is still hot, and the pace of the last two months is still at a troublesome 5% to 5.5%.

Japanese PPI data are available ahead of the CPI data. In the shaded columns of the table, we can compare PPI trends in the EMU and the U.S. through July, as well as Japan's own CPI trends.

These lagged comparisons show that PPI inflation in the European Monetary Union, while excessive over 12 months and six months, somewhat like Japan, has shown a sharper deceleration over three months. In the U.S., finished goods PPI inflation shows somewhat more tempered overall performance compared to Japan, but the just-released August data have turned hot again. The global PPI picture is not reassuring.

However, Japan's CPI, which is the more important reading for central bank attention, shows inflation at 2% over 12 months, rising to a 3% pace over six months and to a 4.4% annualized rate over three months. Japan’s core inflation similarly registers as an expansion of about 1.5% over six months and 12 months but logs a 2.8% increase over three months. Inflation remains restless.

Brent oil prices declined in August, but in spot markets oil is back over $100 a barrel, so it's not clear that we should view August, or the three-month trends, as good news. The Strait of Hormuz continues to be adversely affected. While some oil is getting out, clearly not enough is in circulation to calm world oil markets. In addition, there's a lot of concern about what's going to happen to LNG supplies as winter approaches and LNG is used for heating fuels, particularly in Europe.

Quarter-to-date inflation shows hot numbers for Japan's overall PPI and all of manufacturing. Running at a pace of about 6% in the quarter, there's not much that's reassuring despite the fact that there is a step-down of inflation in August. And will the August ‘print’ even be sustained?

The right-hand column shows the correlation between the price measures in the stub of the table at the left and oil prices. Japan's PPI has positive correlations of about 0.4 with Brent; the European Monetary Union has a PPI correlation of about 0.55. In the U.S., the PPI finished goods index has a correlation of about 0.4. However, in Japan, the CPI has a negative correlation of about -0.2 to -0.4.

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The Bank of Japan has been on a bit of a hot spot as its inflation numbers have run on the hot side for the measures that it focuses on the most. The yen has been weak, and there have been U.S. and Japan operations sporadically to try to support the yen and keep it from continuing to slide. Some of the intervention monies that have been spent have been extremely large. One issue in Japan is an unexpected step-up in fiscal spending by the relatively new Takaichi government that has staked out a need to invest and modernize Japan’s industry to cement future competitiveness. Still, oil prices and foreign exchange values loom large in terms of gauging inflation and monetary responses in Japan. Fiscal spending also has markets on their back foot worried about excess spending. We are looking to upcoming U.S. Federal Reserve and Bank of Japan meetings in the week ahead. With a new U.S. CPI released, it's going to be harder for the Federal Reserve to hold its line on interest rates because inflation is excessive; it is not stepping down, and it may be stepping up its pace. On top of that, the Fed has to decide how it wants to deal with increasingly unruly energy prices.

The U.S. situation is complicated by being involved in an unpopular war with midterm elections coming, having a president who's looking to pull out any stops he can to improve his popularity, at a time that he appears to be stuck in a war that's unpopular and that unpopular war is also priming inflation by causing economic assessments to become increasingly dour. The U.S. conflict with Iran will determine the fate of the Strait of Hormuz and oil price developments globally for the foreseeable future. It is a particularly difficult time for policy in the U.S. At the same time, the U.S. has been doing whatever it can to help Japan control its slippery weak exchange rate because controlling that rate is also in U.S. interests.

Japan’s PPI Cools in August – Still Runs Hot

Andrew Cates

**From easing to tightening**
Market expectations concerning Fed policy have turned completely since January. Contracts covering December 2026 and the first half of 2027 then implied a federal funds rate a little above 3 per cent, comfortably below the rate the Fed was actually running, and an easing cycle was the base case. That gap closed in March and has since inverted, with the move accelerating over the past fortnight. Energy is the immediate cause. The conflict with Iran has kept crude above $100 a barrel, and August’s inflation report showed the pass-through into core prices that policymakers had hoped to avoid. This week’s quarter-point increase was accordingly almost fully priced beforehand and settled little on its own. The framing around it was another matter. Sixteen of the eighteen participants who submitted projections expect at least one further increase this year, four of them two, and the median path is held at around 4.1 per cent through the end of next year with no cuts at all. Chair Warsh’s insistence on a timelier return to target was taken as ruling out an early reversal, and equities gave up their initial gains as he spoke. Futures now sit above the committee’s own path by the middle of 2027, and the long end has followed rather than steadied. A policy rate expected to approach 4.5 per cent alongside a ten-year yield above 5 per cent speaks to term premia as much as to the Fed.

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**Who is paying for the boom**
The tightening is arguably not the product of corporate borrowing. The latest US financial accounts reveal that American non-financial companies ran a financing surplus of around 1 per cent of GDP in Q1, which is to say that internal cash flow more than covered their capital spending. The position has held for most of the past four years, and it stands in contrast to 2000, when the sector was running a deficit of more than 3 per cent of GDP at the peak of the last (internet-led) investment cycle. That distinction matters for how the present boom is read. Aggregates conceal distribution, and a small number of hyperscalers and data-centre developers have turned to bond and private credit markets on a scale that unsettled equity investors in recent weeks. At the level of the aggregate sector, however, the marginal claim on the US saving is coming from the US government rather than from companies.

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**A friendlier mix, for now**
The latest September survey reveals that the Blue Chip panel has made much the same adjustment almost everywhere in recent months: growth for this year has been revised up, inflation for this year revised down. Taiwan and Korea account for the largest growth upgrades, both for the same AI-related reasons, while the United States, the euro area, Japan, the United Kingdom and India all sit in the same quadrant on a more modest scale. China alone (in our sample in the chart below) has seen neither forecast moved. The combination reads well, but it needs qualifying. With a fixed target year this far advanced, most of the 2026 inflation number is already determined by outturns, so marking it down is largely a verdict on the first half of the year rather than on the energy shock now working through.

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**The UK’s quiet labour market**
The UK labour market is no longer adding much to inflation pressure. Private-sector regular pay is growing at around 3 per cent, the slowest rate since 2020 and below its average in the years before the pandemic. Vacancies have fallen to just over 700,000, the lowest outside the pandemic period since 2014, and payrolled employment declined again in August, leaving it around 145,000 lower than a year earlier. Unemployment, at 4.9 per cent, is up on the year. Smaller firms continue to tell the official vacancy survey that they are holding back from recruitment because of labour costs. None of this settles the Bank of England's decision later this week, since the inflation problem is arriving from outside rather than from wages.

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**China is producing strongly but spending weakly**
China's August data extended a familiar divergence. Industrial output accelerated 5.2% y/y in August after 4.5% in July, beating expectations despite four typhoons disrupting activity along the east coast. Retail sales, in contrast, grew by just 0.4%. Fixed investment in the first eight months was more than 7 per cent lower than a year earlier, a deeper contraction than through July, and investment in real estate development fell by close to a fifth. The weakness is no longer confined to property: total fixed investment turned negative last year and the pace of decline has steepened since, with private investment contracting while state-owned enterprises hold the total up. For the rest of the world the arithmetic is straightforward. An economy producing strongly and consuming weakly exports the difference, and potentially exports disinflation with it. That makes China a partial offset to the energy shock elsewhere, and raises the odds of further domestic stimulus in the immediate weeks ahead.

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**Ten days in September**
Korean customs data offer the earliest and cleanest reading on global technology demand, and the first ten days of September produced some of the largest numbers on record. Semiconductor shipments were worth $16.5 billion in that window, close to three and a half times their value a year earlier, and accounted for 47 per cent of all Korean exports. Total exports rose by more than 80 per cent, with shipments to China doubling and those to the United States more than doubling. This is the phenomenon behind the Taiwanese and Korean forecast upgrades noted above, and it is the physical counterpart of the capital spending recorded in the American accounts. It also concentrates risk. Close to half the export earnings of a major economy now rest on a single investment theme, financed in part by borrowing whose terms are set in the market that has repriced in recent weeks.

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The cost of energy and the cost of money set the tone this week. Brent crude held above $100 a barrel with a major Saudi pipeline still offline, and the Federal Reserve raised the federal funds rate by a quarter point, its first increase since 2023. The projections accompanying the decision mattered more than the decision itself, and futures have since priced a policy rate by the middle of 2027 above anything the committee has pencilled in, with the ten-year Treasury yield through 5 per cent for the first time since 2007 (chart 1). But the source of that tightening is worth dwelling on, because American companies are not competing for credit. The non-financial corporate sector is generating more cash than it spends, and has been for most of the past four years (chart 2). Forecasters have meanwhile spent the summer nudging growth forecasts up and inflation forecasts down for this year, with Taiwan and Korea marked up by some distance the most (chart 3). Britain provided a counterpoint, with pay growth and vacancies both back at or below pre-pandemic norms ahead of the Bank of England’s decision (chart 4). China’s August figures showed industrial output accelerating while investment contracted more deeply (chart 5). And Korean customs data for the first ten days of September gave yet another reading of how much of world trade now runs through a single product (chart 6).

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Charts of the Week: The Price of Money

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