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Trade tensions, sticky inflation, and diverging growth
Stronger-than-expected core inflation in the U.S., resilient UK consumer demand, and mounting Japanese trade concerns add complexity to the global monetary outlook.
U.S. Core PCE rose 0.4% in February, the fastest pace in over a year, with the annual rate at 2.8%.
UK retail sales unexpectedly surged 1.0% month-over-month, led by discretionary spending.
BoJ policymakers grow more cautious on rate hikes amid escalating U.S. trade tensions.
Sticky core inflation in U.S. PCE data
Fresh economic data from the U.S., U.K., and Japan are painting a more complicated picture for global central banks, with inflation remaining sticky in the U.S., consumer activity picking up unexpectedly in Britain, and trade concerns clouding the Bank of Japan's path to normalization.
In the United States, the Personal Consumption Expenditures (PCE) price index—the Federal Reserve’s preferred inflation gauge—rose 0.3% month-over-month in February, maintaining the same pace as January and December. Goods inflation eased to 0.2%, while service prices accelerated to 0.4% from 0.2% previously. However, the more closely watched core PCE index, which excludes volatile food and energy components, climbed 0.4% in February—the largest monthly increase since January 2024 and above market expectations of 0.3%.
On a year-over-year basis, the PCE price index held steady at 2.5%, in line with forecasts. However, the annual core PCE rate rose to 2.8%, exceeding an upwardly revised 2.7% in January and surpassing consensus projections. Food prices were flat in February after a 0.3% gain in January, while energy prices registered only a 0.1% uptick following a sharp 1.3% increase the previous month.
UK retail sales defy expectations
Meanwhile, in the United Kingdom, retail sales surprised significantly to the upside. Sales volumes rose 1.0% in February from the previous month, far exceeding market expectations of a 0.3% decline. The rebound was broad-based, led by strong performances in non-food categories including department stores, clothing retailers, and household goods suppliers. The only segment showing weakness was supermarkets, which experienced a slight dip following gains in January.
Over the three months to February, sales volumes increased 0.3% compared to the prior three-month period, and were 2.0% higher year-on-year, reflecting underlying resilience in UK consumer demand despite persistent inflation and fiscal tightening.
BoJ flags growing trade-driven risks
In Japan, the Bank of Japan's Summary of Opinions from its March monetary policy meeting highlighted intensifying concerns over the negative spillover effects from U.S. trade policy. One board member emphasized that downside risks related to U.S. tariffs have “rapidly heightened,” warning that further escalation could harm Japan’s real economy. The policymaker urged caution in considering further rate hikes if trade tensions worsen.
Several members echoed those sentiments, citing elevated uncertainty from global supply chain disruptions and increased competition from low-cost Chinese imports. While the BoJ continues to see a pathway toward policy normalization, it emphasized that the timeline remains heavily dependent on inflation dynamics, wage growth, and the business outlook, particularly for small and medium-sized enterprises.
One opinion suggested that if core inflation continues to edge closer to the 2% target, the central bank should be prepared to transition from accommodative to neutral policy. Nonetheless, the tone of the meeting suggests a measured approach, with trade-related uncertainty likely to dictate the BoJ’s next steps.
