Economy in Brief

Swiss HICP inflation in July was zero month-to-month. In June, it was zero month-to-month. In May, it was 0.1% month-to-month. Year-over-year HICP inflation is 0.7%, compared to a year ago when it was 0.1% over 12 months.

The same metrics viewed through the domestic measure of Swiss inflation are even lower. In July, domestic prices rose 0.1%; in June, they fell by 0.1%; and in May, they were unchanged. The 12-month inflation rate for the Swiss CPI in July was 0.4%; a year ago the 12-month change was 0.2%. Pinch me! Am I dreaming?

And yes, Switzerland is on the same planet as the United States, Europe, and the United Kingdom.

Swiss inflation going back to 2020 has a peak year-over-year rate in its core of 2% based on monthly data. The headline 12-month rate at its peak was 3.4%. Excluding administered prices, the peak inflation rate in Switzerland was 2.7%. One of the main things that Switzerland has going forward is that the Swiss National Bank (SNB) has incredible credibility. It waited as long as the Fed did to raise interest rates, but it raised rates quickly up to the level of the core inflation rate. Once inflation began to fall, the SNB continued to raise rates until it became clear that the policy rate had begun to hover above the inflation rate. At that point, the bank flattened out its rate profile, then turned into a rate-cutting mode.

Once again after the inflation rate had been arrested and fell below 1%, the SNB continued to cut rates until inflation was at zero and so were rates.

The U.S. has not had the same experience with inflation. U.S. inflation has lingered and the Federal Reserve has continued to hold its policy rate above the 12-month trailing inflation rate.

Swiss performance is unique, suggesting that monetary policy right now is not needed to control inflation, at least not in Switzerland. But this undoubtedly has a lot to do with expectations about the behavior of the SNB and the dynamics of the Swiss economy and capital markets.

Swiss inflation began to track the 1% mark in early 2024. The core rate fell into line at the same time, with very little lag. This also is very unlike the U.S. experience.

The S&P manufacturing PMIs for July show a group of 17 countries plus an aggregate for the European Monetary Union. Across these 18 observations, there is broad, but uneven, improvement on a month-to-month basis.

The median reading for July increases slightly to 51.9, a gain of 0.5 diffusion points on a month-to-month basis.

44.4% of reporters are improving on a month-to-month basis. Measured over three months compared to six months, 33.3% are improving; over six months compared to 12 months, 66.7% are improving; and over 12 months compared to 12 months ago, 83.3% are improving. Despite the monthly statistics showing a mixed performance and evidence of some soft spots, the general trend for manufacturing is to show that improvement is in place.

The percentile standing for the July diffusion indexes on data back to 2021 shows an average standing of the 69th percentile across the 19 reporters. That means since 2021 the observations have generally been stronger than this only about 30% of the time, marking this as an ongoing improving situation for manufacturing.

The reporting countries with percentile standings below their medians (below a 50% standing on a queue basis) are China, Russia, India, Brazil, Indonesia, and Turkey.

The strongest countries on a queue percentile standing basis are Japan with a 91.0 percentile standing and Mexico with an 88.1 percentile standing. In addition, South Korea has an 85.1 percentile standing and Malaysia has an 83.6 percentile standing.

At the bottom of the table, we have groupings of countries by various areas or characteristics. The developed group—which includes the United States, the United Kingdom, the European Monetary Union, Canada, and Japan—has an average queue standing in its 72.5 percentile. The BRIC countries have a standing in their 21.6 percentile and the average for Asia is in its 64.7 percentile. While the BRIC countries are lagging, generally speaking they had been performing better during the past; as of July, China has a diffusion reading for its manufacturing sector at 49.2, Brazil at 47.5, Russia at 50.7, and India at 53.5. The BRICs generate a low percentile standing, but their July diffusion readings are more centrist than the rankings might seem to imply.

This report shows manufacturing engaged in some amount of recovery. However, there's still a lot of unevenness in the global economy, still a lot of work left to do, and still a lot of geopolitical risks in play.

In this week's Letter, we dive into the latest Blue Chip Financial Forecast (BCFF) survey results in light of key developments around Asia and the broader world economy. We find that, despite the recent flare-up in US-Iran tensions, panellist expectations for policy rates remain little changed, bar the US (chart 1). Central banks are still seen as likely to continue diverging significantly across regions in response to the volatility in global oil prices (chart 2). The latest on the US-Iran conflict brings hopes of another deal on the horizon, as part of a broad on-again, off-again pattern. Those hopes have sent crude oil prices lower, albeit with flows through the Strait of Hormuz remaining at a trickle (chart 3). As global oil supply remains constrained, one key area to watch is Chinese crude oil imports (chart 4), which have slumped since the conflict broke out. There is no telling when Chinese buying will recover, if ever, and if so, by how much. Moving to Japan, and taking these developments into account, the Bank of Japan held its policy rate steady at its recent meeting. Inflation risk is still flagged as being tied to the upside (chart 5). That may threaten to upend real wage gains this year, should a price flare-up materialise extensively enough. Yen intervention talk has also returned to the fore, with the US and Japan confirming recent intervention moves. Both have signalled that more may come if needed, although the yen remains squarely within its longer-term weakening trend (chart 6).

Blue Chip Financial Forecasts Last week, we published the August 2026 Blue Chip Financial Forecast survey results. Despite the flurry of recent headline developments around the world, we found panellist expectations only modestly changed from last month. In particular, views of 12-month ahead policy rates were little changed or unchanged for every economy bar the US (chart 1). US expectations now point to slightly higher policy rates than a month ago. Among the economies covered by the survey, the highest expected 12-month ahead policy rates still relate to Australia, followed by the US and the UK. At the other end, the lowest expected rates relate to Japan and Switzerland. The slightly higher expected US policy rate may well incorporate, among other factors, the recent re-escalation in US-Iran tensions and the inclinations of new Fed Chair Warsh. We return to those tensions in a later section below.

The harmonized index of consumer prices (HICP) for the European Monetary Union (EMU) surged in July, rising by 0.5% after having sagged in June with a -0.1% month-to-month change. The ceasefire that had temporarily been arranged with Iran in June has given way to the reality of ongoing war and ongoing strikes against tanker traffic. While there are some ongoing talks among the combatants, there is not a lot of hope for another ceasefire that's going to last. Both the United States and Iran have their own particular needs to have a ceasefire. But Iran took the last ceasefire as an opportunity to rebuild, recalibrate, apparently strengthen its military capabilities, and then extend its demands for control of the Strait of Hormuz. These were all nonstarters from the U.S. perspective, and I presume from a global perspective as well. The conditions necessary to underpin a ceasefire with some staying power simply do not exist anymore. The U.S. has resorted to hitting Iran harder.

As a result, energy prices have moved back up and inflation in July moved back up in the EMU. Inflation shows a 2.9% rise over 12 months, a 4.1% annual rate of increase over six months, and a 2.6% annual rate of increase over three months. All of these are excessive with respect to the ECB objectives.

Over six months inflation is excessive in the EMU and in its four largest economies: Germany, France, Italy, and Spain. The best (the lowest) inflation performance is in Germany at 3%, while the worst inflation performance is in Italy at 5.2%. These four countries all exceed the ECB’s desired pace of 2% over 12 months as well. Twelve-month Spanish inflation runs at 3.8%, while in France inflation nails down the low side at 2.3%. Over three months, conditions are more varied because we're mixing in this one-month period of very good inflation news with two months of not so good inflation news. Over three months, Spain still logs a 4.4% increase in its HICP at an annual rate, but France logs 1.2% and Italy logs 1.6%; Germany's pace comes in at 2.8%.

We have core inflation or inflation excluding energy metrics (ex-energy in the case of Germany) for three of the four large countries. These metrics for July ranged from a 0.2% increase month-to-month in Germany to a 0.4% increase in core inflation in Italy. The ex-energy or core measures are within reach of the ECB’s target when applied to the core on a country basis. For Germany, the pace is 2.2% over 12 months, on the low side; for Italy, it’s at 1.6%. But excessive inflation persists for Spain where the core measure is at 3%. Over six months, results are highly similar to what we see over 12 months, but over three months we see German inflation at 2.3%, Italy at 2.4%, and Spain at 3.1%. All of these core or ex-energy measures become uncomfortable over three months.