Core Data: Confidence Index Hits Five-Month High, Inflation Expectations Ease

According to the monthly survey released by the University of Michigan on July 19, the U.S. consumer confidence index edged up in July, reaching its highest level in five months. Key factors driving this change include easing pessimism about short-term business prospects and a decline in consumers' expectations for inflation over the next year, from 5% previously to 4.4%.

However, the survey also showed that American households' expectations for their personal financial situation declined in July. The current consumer confidence level is not only well below the reading from December last year but also significantly below the long-term historical average. This contrast suggests that despite a marginal improvement in overall sentiment, households remain cautious in their economic perceptions.

"Unless consumers are convinced that inflation is unlikely to worsen—for example, if trade policy stabilizes in the foreseeable future—they are unlikely to regain confidence in the economy," said Joanne Hsu, director of the University of Michigan's Surveys of Consumers, in a statement.

Macro Background: Mixed Economic Signals, Growing Divisions Within the Fed

The recent stabilization in consumer confidence coincides with mixed signals from U.S. economic data, while Federal Reserve officials are increasingly divided over the outlook for employment and inflation, as well as whether to begin cutting interest rates this month.

On the demand side, data released by the U.S. Census Bureau on July 18 showed that retail sales rose 0.6% month-over-month in June, reversing declines over the previous two months. Of the 13 retail categories tracked, 10 recorded growth, covering key areas such as motor vehicles, food and beverages, and building materials.

On the employment side, data from the U.S. Bureau of Labor Statistics showed that the unemployment rate fell to 4.1% in June from 4.2% in May, with nonfarm payrolls increasing by 147,000 jobs that month—an overall healthy pace. However, it is worth noting that state and local governments contributed about half of the new jobs, while private-sector hiring was relatively moderate.

On the inflation front, the Bureau of Labor Statistics reported on July 16 that the Consumer Price Index (CPI) rose 2.7% year-over-year in June, up from 2.4% in May. Imported goods were a major driver of this price increase, to some extent confirming the pass-through effect of tariffs on prices. Sub-item data showed that clothing prices rose 0.4% month-over-month, while household furnishings and appliances prices increased by 1% and 1.9%, respectively.

Policy Debate: Persistence of Tariff-Driven Inflation Is Key Point of Divergence

The outlook for inflation, employment, and economic growth largely depends on whether tariff-induced price increases will fade naturally within a few months or persist into next year. Several Federal Reserve officials have recently sent differing signals on this matter.

Fed Governor Adriana Kugler warned in a speech on July 17 that trade policy is putting upward pressure on inflation and expects prices to rise further later this year. She said: "Given that the employment side of our mandate remains stable—with the unemployment rate still at historic lows—while short-term inflation expectations are elevated and tariffs are pushing up goods inflation, I believe it is appropriate to keep the policy rate at its current level for some time."

New York Fed President John Williams took a similar stance in remarks on July 16. He expects import tariffs to push inflation up by about 1 percentage point over the second half of this year and the first half of next year. He believes that keeping the federal funds rate in the "moderately restrictive" range of 4.25% to 4.5% "is entirely consistent with achieving our maximum employment and price stability goals."

However, Fed Governor Christopher Waller expressed a different view. On July 17, he called on policymakers to cut the federal funds rate by 25 basis points at this month's meeting. Waller argued: "Tariffs are just a one-time increase in the price level; aside from temporarily pushing up prices, they will not cause sustained inflation." He further noted: "While the labor market looks okay on the surface, once expected data revisions are taken into account, private-sector job growth has nearly stalled, and other data also indicate increased downside risks to the labor market. With inflation near target and upside risks limited, we should not wait for the labor market to deteriorate before cutting rates." Additionally, Waller said that over the long term, the central bank should aim to gradually lower the benchmark rate to a "neutral" level of 3%—a level Fed officials believe neither restrains nor stimulates economic growth.