Take Two: US inflation data drives markets higher; Eurozone growth slows

What do you need to know?

Markets rallied last week as US consumer price inflation beat expectations to hold steady at 2.7% in July. This boosted hopes that the Federal Reserve (Fed) will cut rates in September, amid signs that the new trade tariffs were not impacting prices as much as expected. However, core inflation – excluding more volatile food and energy costs - was higher than anticipated at 3.1% while producer prices also rose, tempering rate cut expectations. During the week, the US’s S&P 500 and Nasdaq indices hit new highs while Asian stocks also enjoyed gains, with Japan’s markets also reaching fresh highs after the US further delayed new tariffs on China.

Around the world

The Eurozone economy grew by 0.1% on a quarterly basis in the second quarter (Q2), a second official estimate confirmed. This was down from 0.6% in the previous quarter, though the Q1 reading had been inflated by US import frontloading ahead of tariffs. Meanwhile, industrial production across the Eurozone fell 1.3% in June from the month before, indicating the bloc may be less resilient to the trade war than earlier hoped. Elsewhere, the UK economy grew by 0.3% in Q2, slowing from Q1’s 0.7%, but surpassing expectations of only 0.1%.

Figure in focus: 104.4 million

Global oil demand is expected to reach 104.4 million barrels per day (bpd) by 2026, an increase of around 700,000 bpd this year and next, according to the International Energy Agency (IEA). Demand growth for 2025 has been repeatedly downgraded since the start of the year. The IEA said the latest data shows “lacklustre demand across the major economies and, with consumer confidence still depressed, a sharp rebound appears remote”. It noted consumption in emerging and developing economies has been weaker than expected, particularly in China, Brazil, Egypt and India. The aviation industry is a notable exception, with summer travel driving jet fuel demand to all-time highs in the US and Europe.

Words of wisdom:

Involution: Involution refers to overcapacity and excessive, non-productive competition among companies. China has been enduring fierce price wars, which have damaged profitability, helping to accelerate its longest period of deflation since the 1990s. Chinese officials are aiming to combat involution in sectors suffering from extreme over-production, such as electric vehicles, to tackle deflation and help boost economic growth. Notably, China’s annual consumer price inflation was flat in July, compared to 0.1% in June, while the producer price index fell 3.6%, its 34^th consecutive decline. A reduction in overcapacity should provide support for reflation in factory prices but China continues to face headwinds from the US administration’s trade tariffs.

What’s coming up?

On Tuesday, Canada publishes its inflation rate for July; Europe and the UK follow with their own updates on Wednesday, when the Fed also posts the minutes from its recent policy meeting, where it opted to leave interest rates unchanged at 4.25%-4.50%. On Thursday, several flash composite Purchasing Managers’ Indices (PMI) are released including those covering the Eurozone, UK, US and Japan. On Friday, Japan updates markets with inflation numbers. The annual Jackson Hole economic policy symposium takes place Thursday through to Saturday; this year’s theme is “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy”.