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Japan CPI cools, but Fed policy remains divided on tariff response
Japan’s inflation slowed to a 7-month low in June, while Fed officials clashed over the need for a July rate cut as tariff uncertainty clouds the U.S. outlook.
Japan’s CPI eased to 3.3% in June, driven by weaker core and headline inflation, though food prices—especially rice—remained a major pressure point.
Fed Governor Waller called for an immediate rate cut, arguing inflation has fallen enough and tariffs are transitory.
Markets remain skeptical of a July move, with odds of no change above 97%, reflecting a broader FOMC preference to wait for clearer data.
Fed’s Daly supports two cuts this year but urged patience to avoid weakening the labor market unnecessarily.
Japan’s CPI cools, but food inflation remains sticky
Japan’s annual inflation rate dropped to 3.3% in June, down from 3.5% in May, marking the lowest level since November 2024. Core inflation, which excludes fresh food and energy, also eased to 3.3%, reflecting a modest three-month slowdown.
Yet the disinflation was uneven. Food prices surged by 7.2%, up from 6.5% in the previous two months. The standout shock came from rice, which skyrocketed 100.2% year-on-year—despite Tokyo’s targeted policies to curb staple food inflation. Monthly CPI rose by just 0.1%, down from May’s 0.3%, indicating softer price momentum overall.
Meanwhile, clothing prices held steady at 2.6%, and communications costs jumped to 5.9% from 1.9%, reflecting base effects and rising service sector input prices.
Japan’s inflation data adds to a growing chorus of mixed signals across global economies. While headline inflation shows signs of cooling, persistent price pressures in essentials are complicating the policy outlook for central banks.
Waller urges immediate rate cut despite muted market reaction
Fed Governor Christopher Waller renewed his push for a July rate cut, arguing that the current policy rate is “too tight” given recent inflation and growth dynamics. Speaking before the Fed’s communications blackout period, Waller stressed that recent tariffs are likely to result in only a temporary price shock, which should be looked through.
He noted that real GDP grew just 1% in H1 2025 and is expected to remain weak into year-end. With inflation near 2% and unemployment at 4.1%, he said policy should shift closer to the Fed’s estimated neutral rate of 3%, instead of staying 125–150 bps above it.
However, Waller’s call failed to sway markets. Fed fund futures still show a 97% chance of no change in July. Investors see him as an outlier within the FOMC rather than a bellwether. Markets are still pricing in a potential first cut in September, once more data is in hand and the impact of August’s tariff deadline is clearer.
Daly backs easing in 2025, but urges caution
San Francisco Fed President Mary Daly echoed support for rate cuts this year, but downplayed the urgency. She described two cuts in 2025 as a likely outcome, aligning with the broader consensus on the FOMC.
Daly dismissed July timing as “not the most relevant piece,” saying the Fed should focus on avoiding policy mistakes. She emphasized that the final stretch of disinflation does not require triggering a downturn, and that policymakers should be careful not to tighten into weakness.
Daly’s remarks reflect a cautious path forward: prepare for easing, but avoid rushing. Her stance suggests the Fed prefers gradual normalization rather than immediate action, especially while wage data and labor market indicators remain fragile.
