Nomura expects U.S. inflation to remain high, and the Federal Reserve to stay on hold for an extended period

Overview

This report is Nomura’s weekly macro research on the U.S. economy, focusing on June CPI, PPI, and core PCE inflation forecasts, review of the Federal Reserve’s monetary policy framework, key U.S. economic data next week, and the U.S. growth outlook. The report believes U.S. growth momentum remains intact, with consumption and manufacturing showing resilience, but core inflation remains clearly above the 2% target; AI-related supply shortages and sticky service inflation could offset part of the disinflationary effect from tariff pressure easing.

Core views

Core views include: first, June core CPI is expected at 0.215% month-over-month, close to May’s 0.208%; second, core goods are still expected to remain in negative territory, as tariff-related pressures on PPI and used-car price declines support the downside; third, supercore CPI is expected to rise to 0.373% month-over-month, mainly supported by lodging prices boosted by World Cup demand; fourth, June core PCE is expected at 0.271% month-over-month and around 3.4% year-over-year, still above target; fifth, future PCE methodological changes may reduce year-over-year core PCE by about 20 bps; sixth, the composition of the Federal Reserve’s task force members does not show a clear policy bias, and Nomura expects the Fed to remain on hold for an extended period.

Analysis framework

The report uses a top-down macro forecasting framework that links CPI, PPI, and PCE subcomponents together, separately assessing the contribution of factors such as core goods, supercore services, housing rents, investment management services, energy prices, and import prices to inflation. It also combines high-frequency indicators, labor market data, retail sales, industrial production, housing data, and consumer confidence to assess growth momentum, and uses Federal Reserve speakers’ comments and policy framework review to gauge the rate path.

Methodology notes

• Macro inflation forecastingCPI-PPI-PCE linkage framework

  Core PCE trajectory is derived from forecasted CPI and PPI subcomponents.

  The report estimates core PCE from CPI and PPI data sources, noting that investment management and investment advisory services in PPI are important inputs to core PCE, so core PCE inflation could be higher than core CPI.

• Monetary policy analysisFederal Reserve reaction function analysis

  Assess the rate path by combining inflation, growth, officials’ rhetoric, and policy framework review.

  The report believes inflation is still high, hawkish rhetoric has strengthened, and dovish bias has weakened, so it expects the Federal Reserve to maintain rates for an extended period, with low near-term probability of an additional hike but risks tilted toward tightening.

• Growth momentum trackingHigh-frequency and leading indicator tracking

  Track growth resilience using retail, industrial production, housing, employment, and consumer confidence indicators.

  The report expects next week’s data to show that growth remains resilient, with the slowdown in retail sales driven mainly by gasoline sales, while manufacturing, auto production, and labor income continue to provide support.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. rates and Treasuries

  Core inflation above target and expected prolonged Fed inaction constrain discounting of rate cuts.

  Strengths

  Resilient growth and stable labor markets reduce near-term recession risk.

  Weaknesses

  Inflation persistence may keep longer-dated and real yields relatively elevated.

  Comparison

  Compared with a pure tariff-shock narrative, the report puts more emphasis on AI supply bottlenecks, wage dynamics, and service inflation as supports for future inflation.

  Risks

  If the Federal Reserve falls behind the curve, it may need faster tightening in the future to restore credibility.

• U.S. equities

  Resilient growth and diffusion of AI investment support risk assets, but valuations are more sensitive to rates and the AI cycle.

  Strengths

  Corporate investment may spread AI spending beyond AI-related sectors, and consumption still benefits from wage income and tax refunds.

  Weaknesses

  A high-inflation and high-rate environment limits valuation expansion.

  Comparison

  The report says that if the AI boom breaks, it could lead to a material repricing of equity valuations.

  Risks

  A cooling of AI enthusiasm, escalation of geopolitical risks, or tighter financial conditions could trigger a market pullback.

• Semiconductors and consumer electronics

  Semiconductor shortages have not yet materially pushed up June consumer electronics prices, but AI-related memory chips and electricity shortages are an upside inflation risk going forward.

  Strengths

  AI capex continues to support demand in related industries.

  Weaknesses

  Supply shortages may create cost pressures and spill over into commodity prices.

  Comparison

  The report elevates semiconductors from a traditional commodity-cycle risk to an important source of AI-driven inflation pressure.

  Risks

  Persistent memory chip shortages or supply-chain disruptions from geopolitical factors, such as the Iran-Iraq conflict, could trigger second-round commodity price increases.

• Oil and energy-related assets

  Lower oil prices reduce inflation pressure on June energy CPI, import prices, and consumer prices.

  Strengths

  Declining energy prices help ease inflation and improve consumer sentiment.

  Weaknesses

  Geopolitical tensions could push oil prices higher again and tighten financial conditions.

  Comparison

  The report argues that the U.S. economy is relatively less vulnerable to an oil-price shock from the Iran-Iraq war because energy is a smaller share of household spending and U.S. has domestic energy production.

  Risks

  Escalating geopolitical risk could worsen fiscal outlooks and hit financial markets.

Key data

• June core CPI forecast0.215% m-o-mMay was 0.208%, and April was 0.376%.
• June supercore CPI forecast0.373% m-o-mHigher than May’s 0.273%, with rising lodging prices being one of the main supports.
• June core PCE forecast0.271% m-o-m; about 3.4% y-o-yHas eased from 0.320% month-over-month in May, but remains significantly above the Federal Reserve’s 2% target.
• Impact of PCE methodology changesaround -20bpThe report estimates that upcoming PCE price methodology revisions will reduce year-on-year core PCE by about 20 bps.
• Q2 GDP tracking value2.3% q-o-q annualizedRevised down from 2.4% last week.
• Real final sales to private domestic purchasers2.9%The report says this estimate has been revised up slightly.
• June retail sales forecast0.3% m-o-mBelow May’s 0.9%, primarily due to weakness from lower gasoline sales.
• June industrial production forecast0.6% m-o-mManufacturing output is expected to rebound, with contributions from autos and core manufacturing.
• July NAHB housing market index forecast37Up from 35 in June, with lower mortgage rates and the Iran-Iraq ceasefire potentially improving builder sentiment.
• July University of Michigan consumer sentiment initial reading forecast51.0Up from 49.5 in June, with lower energy prices and higher equity prices potentially improving sentiment.

Impact & implications

The key implication for markets is that near-term U.S. economic data are still unlikely to support a rapid rate-cut cycle. Inflation may gradually ease but remains above target, so the Federal Reserve is more likely to remain patient. For asset allocation, this means rate-sensitive assets remain constrained by prolonged policy at elevated levels. AI and semiconductor-related supply bottlenecks may continue to influence the inflation narrative, while oil prices and geopolitical shifts can affect the macro path through energy prices, consumer sentiment, and financial conditions.

Risks

• Further escalation of geopolitical risks, leading to tighter financial conditions and a deteriorating fiscal outlook.
• Increased political pressure on specific FOMC members, potentially weakening Federal Reserve credibility and triggering sharp market reactions.
• A breakdown in the AI boom could lead to a material repricing of asset valuations.
• Persistent memory-chip shortages and supply-chain disruptions could cause a second wave of commodity price increases.
• Core inflation remaining above target and sticky service inflation could mean the Federal Reserve lags the curve.
• Policy recommendations from the Fed’s task force may not be accepted by a majority of FOMC participants.

What to watch

• June CPI, PPI, and core PCE data, especially prices for core goods, supercore services, and investment management services.
• Federal Reserve Chair Warsh’s semiannual testimony at the House Financial Services Committee and the Senate Banking Committee.
• Subsequent policy recommendations from the Fed’s five task forces and the degree of acceptance among FOMC participants.
• Retail sales, industrial production, housing starts, NAHB index, initial unemployment claims, and University of Michigan consumer sentiment.
• Whether AI-related semiconductor, memory chip, electricity, and electronics component price pressures are transmitting into PPI and CPI.
• Changes in oil prices, import prices, and geopolitical risk following the Iran-Iraq ceasefire.