From the Desk

July’s headline and core Consumer Price Index (CPI) came in right in line with market expectations. However, both measures are still well above target levels. Based on market price movements there was little in this inflation reading that should push the U.S. Federal Reserve to change its current stance of continuing to scrutinize incoming information.

Indeed, this report had something for everyone within the Fed. For the doves on the Federal Open Market Committee (FOMC), inflation is moving in the right direction, but for the hawks, it’s still decelerating at a glacial pace. None of this builds a pressing case to hike rates in the near term. But September could still be a fiery FOMC meeting, particularly if the hawk count continues to grow.

The concern from the hawkish Fed contingent is that core inflation has been stalled well above its 2% target for years. Therefore, if the Fed is to maintain a credible target, it should take some action to achieve it or communicate unequivocally why it’s holding off – something markets are starting to pressure for. Fed Chairman Kevin Warsh has indicated there may be other measures of inflation he would prefer. Some are already backed by the Fed’s own research. These include the Federal Reserve Bank of Cleveland’s trimmed mean, which excludes outliers, the Federal Reserve Bank of Atlanta’s sticky-price CPI, which captures slow-to-change price or contract levels, and “supercore inflation,” favored by the previous Fed Chairman, that tracks services excluding shelter expenses. All three measures are running significantly above target and have been for over five years.

The hawks might have a point. In every direction, you still see stubborn inflation that has been a multi-year problem. Yes, it is coming down, but appears to be in no rush to hit target. Meanwhile, markets still expect the Fed to achieve its target. But they are getting nervous and want the Fed to communicate more explicitly about its concerns and intentions.

Sources: Bloomberg, The Financial Times, 2026.

Parts of Europe this week, including the U.K. and France, faced their fifth heatwave since May. The combination of heatwaves, droughts and wildfires has displaced hundreds of thousands of people, disrupting transportation, power systems and weakening labor productivity.

Much of the debate has focused on Europe’s lack of air conditioning, but that misses the bigger drivers of economic impact. Exceptionally low water levels on the Rhine and Danube rivers have constrained shipping and raised freight costs. Power production from nuclear and hydro plants has been curtailed, driving up energy costs. E.U. crop yield forecasts have been reduced.

In the U.S., July was the hottest month on record – breaking the record set during the 1936 Dust Bowl. New research finds heat shocks can depress state-level economic conditions for months, mainly through reducing labor supply, productivity and time allocated to work.

It has been a historic wildfire season in the Pacific Northwest as Oregon has more burned acreage than any year in history. In Canada, British Columbia declared a state of emergency due to wildfires. These events are placing a growing fiscal burden on governments, as emergency response and rebuilding require billions in new spending when debt levels are already elevated.

A modeled estimate by Triodos Bank puts the 2026 E.U. GDP impact of extreme heat at near €180 billion, or about 1% of GDP, effectively wiping out any growth this year. The risk is not that this summer is an outlier, but that it becomes a recurring macro and fiscal shock. Looking ahead, 2027 is unlikely to provide relief – there are increasing odds that next year will be the hottest year in recorded history.

Sources: Bloomberg, The Globe and Mail, The Guardian, National Bureau of Economic Research, Reuters, 2026.