Nomura: Persistent US Inflation Pressures, Hints at Rate Hikes but Likely No Change This Year

Overview

This Nomura US Economic Weekly concludes that US inflation pressures persist, with increasing hawkish Fed rhetoric hinting at potential rate hikes, though the baseline expectation remains for unchanged policy rates this year. The report details employment, inflation, GDP tracking, and Fed policy movements, while noting multiple upside risks.

Core views

On the labor market, the report forecasts May nonfarm payroll growth of 110K, slightly slower than the past two months but still above year-to-date averages; unemployment rate expected to stabilize at 4.3%, with hiring accelerating as labor demand stabilizes. Average hourly earnings growth is forecast to rebound to 0.4% MoM, mainly driven by technical factors. Inflation-wise, April core PCE rose 0.24% MoM, below expectations, but prior revisions pushed YoY to 3.29%, still significantly above the Fed's target. Trimmed-mean PCE fell to 2.3%, but the report argues it underestimates actual inflation by ~48bps due to insufficient reflection of goods inflation dynamics. Financial services prices are expected to rebound in May, with airfares continuing to rise, while energy, semiconductor shortages, and rising transport costs pose upside risks. Regarding Fed policy, officials' rhetoric turned more hawkish this week, with several policymakers stating they would support rate hikes if inflation doesn't decline "timely," though the baseline still expects slowing inflation. The report anticipates unchanged policy rates through year-end but warns that stubborn inflation may force the Fed to "fall behind the curve" and hike rapidly. GDP tracking shows Q2 forecast revised down to 2.4% QoQ annualized, mainly due to weaker-than-expected personal consumption and core capital goods shipments, with new home sales dragging residential investment.

Analysis framework

The firm uses multi-dimensional data cross-validation: employment forecasts combine ADP weekly data, initial jobless claims, and sector mean reversion logic (e.g., retail/courier sectors may pull back after strong growth); inflation analysis contrasts core PCE vs. trimmed-mean PCE differences and decomposes component contributions (e.g., financial services, airfares); policy assessments track Fedspeak wording changes and official divergences (e.g., hawks emphasize "timely" rate cuts, doves focus on energy price declines). GDP tracking dynamically adjusts forecasts based on inventory, trade deficit, consumption, and investment data.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-Price Breakdown

  Inflation indicator comparison and component contribution analysis

  The report compares core PCE vs. trimmed-mean PCE differences and decomposes component contributions (e.g., financial services, airfares) to help readers understand different inflation metrics' coverage and potential biases.

• Event Gaming & Behavioral FinanceExpectation Gap/Management

  Fed official rhetoric and policy expectation analysis

  Analyzing Fedspeak wording changes (e.g., use of "timely") and official divergences to assess policy shift likelihoods, helping readers understand expectation management's market impact.

• Cycle & Sentiment FrameworkInflection Point Analysis

  Labor market stabilization and hiring acceleration

  The report notes stabilized labor demand driving faster hiring and shorter unemployment durations, signaling potential labor market recovery, though sector divergences warrant attention.

• Macroeconomic framework

  GDP tracking forecast dynamic adjustments

  Real-time adjustments to GDP forecasts based on inventory, trade, consumption, and investment data changes, helping readers understand high-frequency data's role in macro forecast revisions.

Key data

• April core PCE inflation YoY3.29%Accelerated from March's 3.24%, still well above Fed's 2% target
• Trimmed-mean PCE inflation YoY2.3%~1pp below core PCE; report estimates it underestimates actual inflation by 48bps
• May nonfarm payroll growth forecast110K3-month average at 137K, strongest since Dec 2024
• Unemployment rate forecast4.3%Expected to drop to 4.1% by year-end
• Q2 GDP tracking forecast2.4% q-o-q arRevised down from 2.6%, mainly due to weaker consumption and investment
• Average hourly earnings growth forecast (May MoM)0.4%Supported by calendar effects turning positive and underlying wage growth

Impact & implications

The report argues that persistently above-target inflation and hawkish Fedspeak may weaken market rate cut expectations, increasing "higher for longer" risks. If inflation doesn't slow "timely," the Fed may be forced to hike rapidly to rebuild credibility, pressuring asset valuations. Geopolitical escalation, AI bubble bursts, or supply chain disruptions (e.g., Iran war, chip shortages) could trigger secondary inflation or financial condition tightening.

Risks

• Geopolitical risks escalating, tightening financial conditions and worsening fiscal outlook
• AI investment frenzy collapse triggering major asset valuation corrections
• Chip shortages and supply chain disruptions (e.g., Iran war) pushing up goods prices
• Fed policy lagging inflation curve, forcing rapid rate hikes
• Political pressures compromising FOMC member independence, damaging Fed credibility

What to watch

• Whether subsequent inflation data (especially core PCE) continues exceeding expectations
• Further Fed official statements on "timely" rate cut wording
• Labor market indicator changes (initial claims, JOLTS job openings)
• Geopolitical events (e.g., Iran war) impacting energy and supply chains
• AI-related investments' actual effects on productivity and inflation