Data Brief: Global Inflation Cooling Amid Economic Growth Slowdown, Key Monetary Policy Decisions Awaited in H2 2026

Data Brief: Global Inflation Cooling Amid Economic Growth Slowdown, Key Monetary Policy Decisions Awaited in H2 2026

July 2026 global macroeconomic data presents a complex picture, with continued cooling of inflation in major economies but significantly weakening growth momentum, creating an unprecedented policy challenge for central banks worldwide. The latest data shows that inflation rates in major economies have generally fallen back to near target levels, but the simultaneous slowdown in service sector expansion, contraction in manufacturing activities, and declining consumer confidence suggest the global economy is entering a new phase of dual weakness in both inflation and growth.

Global Inflation Continues to Cool, But Structural Differences Remain Significant

The latest July global inflation data shows that inflation rates in developed economies have generally fallen back to the 2%-3% range, a significant decrease from the same period last year. US CPI rose 3.1% year-on-year in July, reaching a two-year low; Eurozone harmonized CPI rose 2.8% year-on-year, continuing its decline for the third consecutive month; UK CPI rose 3.2% year-on-year, down nearly 4 percentage points from its peak at the beginning of the year.

However, the cooling of inflation is not evenly distributed. Data shows that the driving effect of energy and food prices on overall inflation has significantly weakened, while the decline in core inflation (excluding food and energy) has been relatively slow. US core CPI rose 4.2% year-on-year in July, still above the Federal Reserve's 2% target; Eurozone core inflation rate was 3.1%, also significantly above the European Central Bank's 2% target.

This structural difference reflects a shift in inflation drivers. Inflation initially caused by supply chain disruptions and soaring energy prices has largely subsided, while more persistent factors such as wage-price spirals, service sector inflation, and rental costs remain resilient. Analysts point out that this "dual-speed" characteristic of inflation means central banks face more complex trade-offs in policy making.

Economic Growth Momentum Weakens, Service Sector Expansion Slows

In stark contrast to the cooling of inflation, global economic growth momentum is clearly weakening. The global manufacturing PMI index was 48.6 in July, below the threshold for three consecutive months, indicating continued contraction in global manufacturing activities. Among them, Eurozone and Japan's manufacturing PMI fell to 46.8 and 45.2 respectively, the lowest since 2020; US manufacturing PMI remained in the expansion zone at 50.5, but had fallen significantly from its high point at the beginning of the year.

In the service sector, the global services PMI was 52.3, still in the expansion zone but with significantly slowed growth. China's official services PMI fell to 51.2 in July, down 1.3 percentage points from the previous month; US ISM services PMI unexpectedly rose to 55.8 in July, showing resilience in service sector activities, but the new orders index fell to 51.5, indicating future growth momentum may weaken.

Consumer confidence data is equally concerning. The US consumer confidence index unexpectedly fell to 85.3 in July, the lowest since 2024; the Eurozone consumer confidence index was -12.6, in negative territory for the fifth consecutive month. The decline in consumer confidence is mainly due to concerns about future economic growth and employment prospects, which may further suppress consumption expenditure and drag on economic growth.

Job Market Shows Divergence, Wage Growth Slows

The job market is one of the most contradictory areas in the current global economy. On one hand, US ADP employment unexpectedly increased by 224,000 in July, showing resilience in the job market; on the other hand, US initial jobless claims have risen for three consecutive weeks to 265,000, the highest since 2023.

More notably, wage growth has shown clear signs of slowing. US average hourly wages grew 3.8% year-on-year in July, significantly down from 5.1% in the same period last year; Eurozone wage growth also fell from 5.2% at the beginning of the year to 4.1%. The slowdown in wage growth helps alleviate inflationary pressure on one hand, but also reflects cooling in the labor market, which may indicate weakening future consumption capacity.

The divergence in the job market reflects the complexity of economic transformation. Employment growth is strong in industries such as technology, healthcare, and energy, while manufacturing, retail, and construction are experiencing layoffs. This structural change makes the role of employment data in indicating overall economic conditions more complex.

Central Banks Face Key Policy Decisions, Market Expectations Volatile

The complex combination of macroeconomic data presents unprecedented policy challenges for central banks. On one hand, continued cooling of inflation provides room for monetary policy shifts; on the other hand, economic growth slowdown and employment market uncertainty limit the scope for policy easing.

The Federal Reserve is at the center of this policy dilemma. Although July inflation data shows continued cooling, core inflation remains above target, and service sector inflationary pressures have reignited, causing market expectations for a Fed rate cut in September to fluctuate dramatically. Federal funds rate futures show that the probability of a September rate cut has fallen from 85% at the beginning of the month to 65%, and the expected magnitude of rate cuts by the end of the year has been reduced from 100 basis points to 75 basis points.

The European Central Bank faces a similar dilemma. Although the Eurozone inflation rate has fallen significantly from its peak, core inflation remains sticky, and the growth outlook is bleak. The ECB kept rates unchanged at its July meeting but clearly stated it "stands ready to tighten monetary policy further if needed," a hawkish stance that surprised the market.

In contrast, the Reserve Bank of Australia has taken the lead, unexpectedly announcing a 25 basis point rate cut in July to 3.85%, becoming the first central bank among major developed economies to cut rates. This decision is seen as a signal of the global monetary policy shift, triggering expectations of a global rate cut cycle.

Market Response and Asset Allocation Strategies

The complex combination of macroeconomic data has led to significant volatility in global financial markets. Since July, global stock markets have shown volatile trends, with major indices oscillating between positive inflation data and growth concerns. The bond market has shown clear differentiation, with short-term government bond yields falling due to rate cut expectations, while long-term yields have risen due to growth concerns, exacerbating the flattening of the yield curve.

In the foreign exchange market, the US dollar index has maintained its strength due to Fed policy uncertainty, putting pressure on major currencies such as the euro and yen. The commodity market has shown mixed performance, with gold rising above $2,400 per ounce due to increased safe-haven demand, while crude oil prices have fallen below $80 per barrel due to demand concerns.

In the face of a complex macroeconomic environment, investors need to adopt more cautious and flexible asset allocation strategies. Based on current data, we believe the following strategies are worth considering:

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• Increase defensive asset allocation: Against the backdrop of slowing economic growth, increase the allocation ratio of defensive assets such as high-dividend stocks, quality bonds, and cash to reduce portfolio volatility.
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• Focus on structural opportunities: Despite the overall slowdown in economic growth, fields such as artificial intelligence, clean energy, and healthcare maintain strong growth, and these structural opportunities deserve special attention.
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• Diversify allocations: Geopolitical risks and divergent monetary policies have increased market volatility, increasing cross-asset and cross-regional diversification can effectively diversify risks.
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• Adjust duration flexibly: During the critical period of monetary policy shifts, flexibly adjust the duration of bond portfolios to respond to changes in the interest rate environment.
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Future Outlook and Key Data to Watch

Looking ahead to the second half of 2026, the global economy will enter a new phase of dual weakness in both inflation and growth. Against this backdrop, monetary policy will face unprecedented challenges, and central banks will need to find a balance between controlling inflation and supporting growth.

In the coming months, the following data will become the focus of market attention:

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• August non-farm employment data and unemployment rate: Will reveal whether the job market is truly starting to cool.
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• August CPI and PCE data: Will confirm whether inflation continues to fall toward target levels.
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• Q3 GDP data: Will assess whether economic growth has shown a substantive slowdown.
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• Corporate earnings reports: Will reveal whether companies can cope with cost pressures and slowing demand.
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For investors, the complexity of the current macroeconomic environment is both a challenge and an opportunity. By deeply understanding the economic logic behind the data, grasping key signals of policy shifts, investors can find structural opportunities in volatility and build more robust and sustainable investment portfolios.

In conclusion, the global economy in the second half of 2026 will present a complex situation of intertwined cooling inflation and slowing growth, with major central banks facing critical decisions on monetary policy shifts. Investors need to remain vigilant, closely monitor data changes, and flexibly adjust strategies to cope with this uncertain environment.