The stock market rally should not be derailed if this week's inflation data match the consensus estimates. Although consensus for the July Core CPI is a bit on the high side, it may be viewed by the market as not being high enough to worry Fed officials more than they already are. The outcome of US/China tariff negotiations by the August 12 deadline could be more important. Meanwhile, Unemployment Claims data may be adding to evidence of a softer labor market.
July CPI
Consensus looks for 0.2% m/m Total and 0.3% Core CPI for July, with the y/y edging up for both. The estimate looks reasonable, with both upside and downside risk to Core. Upside risk stems from a possibly bigger impact of tariffs than in June. Also, seasonal factors switch to boosting from holding down some important components, such as Lodging Away From Home and Airfares. And, New Vehicle Prices could move up as some discount programs ended. Downside risk stems from a possible smaller impact of tariffs than in June and more discounting in response to soft consumption generally. Also, Owners' Equivalent Rent could move down a bit from 0.3% to the lower 0.2% m/m trend seen in Primary Rent recently.
The market and Fed will probably be looking to see whether the components that seemed to be boosted by tariffs in June continued to rise sharply in July. If they don't, the Fed's favorite view that the tariffs would only result in a one-time boost to prices would be supported. This view is a reason why Fed officials would not be disturbed by a slightly high Core CPI. From a market perspective, a consensus print would encourage expectations of a Fed rate cut at the September FOMC Meeting.
Unemployment Claims Data
The latest Unemployment Claims data suggest a smaller increase in Payrolls in August than in July if Claims stay at these levels for the next few weeks. Both Initial and, particularly, Continuing Claims are above their July averages in the latest week.
ADP Estimate Better Than Payrolls?
Aside from the inappropriateness of Trump's firing of the BLS director, the large revisions in Nonfarm Payrolls in May and June could make the markets pay more attention to the ADP Estimate of Private Payrolls. The revisions brought the BLS prints significantly closer to the ADP Estimates for these two months (see table below).
The ADP Estimate of August Private Payrolls will be released September 3 and the BLS Employment Report September 5. The BLS estimate of the Payroll benchmark revision will be released on September 9. The benchmark revisions will be incorporated into the Payroll data in the January Employment Report, due in February 2026.
Private Payrolls (m/m change, 000s)
ADP Estimate First-Print BLS Latest-Print BLS
March 155 209 120
April 62 167 133
May 37 140 69
Jun -33 74 3
Jul 104 83 83
Labor Cost and Productivity Data
The Q225 data on Productivity, Compensation/Hour, and Unit Labor Costs have mixed news for the economy and inflation fight:
1. The trend in Productivity Growth is back to its modest pace of the 1990s. Although it popped to 2.4% in Q225, it was largely a rebound from the -1.8% in Q125. The volatility reflects the measurement problem stemming from the large swings in net exports in GDP. The y/y of 1.3%, which eliminates this problem, is lower than the increases seen in 2024 and 2023 (see table below). Adding the 0.4% trend in Population, trend GDP looks to be about 1.7%, at the lower end of the Fed's 1.7-2.0% estimate of longer-run growth -- a modest pace.
2. Compensation/Hour -- the broadest measure of labor costs -- rose about 4.0% both q/q (annualized) and y/y in Q225. Both are below the paces seen in 2024 and 2023. So, this is good news for the inflation fight and in line with the slowdowns seen in Average Hourly Earnings and Employment Cost Index.
3. Taking both Productivity and Compensation/Hour into account, however, the trend in Unit Labor Costs (Compensation divided by Productivity) has moved up. The y/y increase was 2.6% in Q225, higher than the increases seen in 2024.
From the Fed's perspective, the downtrend in Compensation/Hour suggests the Unemployment Rate is at a level that is holding down labor costs. However, labor costs may have to move down even faster if the trend in Productivity, which the Fed has no control of, does not pick up.
Q225 2024 2023
[ q/q % * y/y %] [Q4/Q4 % change]
Productivity 2.4 1.3 2.7 1.9
Compensation/Hour 4.0 3.9 5.2 4.2
Unit Labor Costs 1.6 2.6 2.4 2.3
* annualized
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