July 19, 2024

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The Fed’s preferred measure of core inflation appears to be cooling

The Fed’s preferred measure of core inflation appears to be cooling

(Bloomberg) — The Federal Reserve’s front-line inflation gauge is about to show some modest relief from stubborn price pressures, bolstering central bankers’ wisdom about the timing of interest rate cuts.

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Economists expect the personal consumption expenditures minus food and energy price index – due for release on Friday – to rise 0.2% in April. This would mark the smallest advance so far this year for the measure, which provides a better snapshot of core inflation.

The overall personal consumption expenditures price index likely rose 0.3% for the third month, according to the median forecast in a Bloomberg survey. This year’s increases stand in contrast to relatively flat readings in the last three months of 2023, underscoring the Fed’s uneven progress in its battle with inflation.

Fed Chairman Jerome Powell and his colleagues stressed the need for more evidence that inflation is on a sustainable path toward their 2% target before cutting the benchmark interest rate, which has reached a two-decade high since July.

The PCE price index is expected to rise 2.7% year-on-year, while the core measure is expected to reach 2.8% – both in line with the previous month’s levels.

Officials met earlier this month on a desire to keep interest rates higher for longer and “many” questioned whether policy was restrictive enough to bring inflation down to their target, according to minutes of their latest meeting.

Read more: Minutes show officials rally around higher interest rates for longer

The latest inflation figures will be accompanied by personal spending and income figures. While demand grew at a solid pace in the first quarter, data will report on services spending after previously reported April retail sales stabilized.

What Bloomberg Economics says:

“The report is likely to provide some encouraging signs that the process of decelerating inflation has not completely stopped. With income growth slowing amid a cold labor market, consumers are gradually starting to crack, which should provide a sustained deflationary impetus into the rest of the year. However, As price pressures continue to catch up, inflation is likely to ease very gradually this year.

—Anna Wong, Stuart Ball, Elisa Wenger, and Estelle Au, economists. For the full analysis, click here

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Other data for the week includes revised first-quarter GDP on Thursday. Economists expect growth may slow from the government’s initial estimate. On Wednesday, the Federal Reserve will release a Beige Book summary of economic conditions across the country.

Among the US central bankers who spoke during the holiday-shortened week were John Williams, Lisa Cook, Neel Kashkari and Lori Logan.

Looking north, Canada will release its first quarter GDP data. Declining monthly momentum in March and weak domestic demand are likely to keep a June rate cut in the central bank’s favour.

Elsewhere, a potential rise in Eurozone inflation, Chinese industrial data and PMI numbers, and price reports from Brazil will be among the highlights.

Click here to find out what happened last week. Below is a summary of what will happen in the global economy.

Asia

China’s manufacturing sector will be in the spotlight over the next week. Industrial data on Monday will show whether profits have bounced back in April after a sharp decline in March that pushed the pace of gains for the first three months to 4.3%.

Continued deflation in producer gate prices and weak domestic demand may keep profitability under pressure. China will receive official manufacturing PMI data on Friday, with the focus on whether the measure will remain above the 50 threshold that separates contraction from expansion for a third month in May.

Also on Friday, Japan’s industrial production growth is expected to slow while retail sales accelerate in April.

Tokyo’s consumer inflation rate may rise slightly in May, heralding gains for national numbers.

Meanwhile, China, Japan and South Korea will hold their first trilateral summit since 2019, with Tokyo and Seoul putting pressure on Beijing by rapprochement with the United States on issues ranging from security to semiconductor production.

Consumer price growth in Australia is expected to slow to 3.3%, still hot enough to keep the Reserve Bank of Australia on its toes.

Vietnam also announces consumer price index data, along with industrial production, retail sales and trade during the week.

At central banks, Kazakhstan sets its benchmark interest rate on Friday.

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Europe, Middle East, Africa

In the euro zone, inflation may accelerate in May to 2.5%, according to economists’ forecasts. The core measure is expected to stop weakening for the first time since July, settling at 2.7%.

In line with broader euro zone data, national releases starting with German data on Wednesday are expected to have gone in the wrong direction in three of the region’s four largest economies. Only Italy is witnessing a slowdown in price growth.

Such results hamper progress towards the ECB’s 2% target, but continued signals from officials of a quarter-point rate cut on June 6 make it unlikely that a single month of data will derail them. However, some policymakers oppose any push for further easing.

“The probability is increasing that within 13 days we will see the first rate cut,” German Bundesbank President Joachim Nagel, a political hawk, said in an interview on Friday. “If there is a rate cut in June, we have to wait, and I think we have to wait until maybe September.”

Other reports in the euro zone include Germany’s Ifo business confidence index on Monday, the European Central Bank’s survey of inflation expectations on Tuesday, and economic sentiment on Thursday.

ECB officials scheduled to speak next week include chief economist Philip Lane and the Dutch, French and Italian governors. The blackout period begins before the decision is made on Thursday.

The Bank of England has already gone silent, canceling all speeches and public statements by policymakers during the campaign ahead of the UK general election on July 4.

Among other European central banks, the Riksbank’s financial stability report on Wednesday and Swiss National Bank President Thomas Jordan’s speech in Seoul will be among the highlights.

Several monetary decisions are scheduled to be made in the wider region:

  • Israel’s central bank is expected to keep interest rates steady at 4.5% on Monday, largely to control war-related inflationary pressures and provide support to the shekel. Governor Amir Yaron is concerned about easing monetary policy and widening the gap between borrowing costs in Israel and the United States.

  • Ghana’s monetary authority is set to leave its key interest rate at 29% on Monday to combat inflation and support its struggling currency.

  • On Wednesday, Mozambican policymakers are preparing to cut borrowing costs, and consumer price growth is expected to remain in the single digits for the rest of the year.

  • On Thursday – a day after elections in which the ruling African National Congress risks losing its majority – South Africa’s monetary officials are expected to keep the key interest rate at 8.25%, with inflation yet to return to the 4.5% midpoint of the target range. .

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latin america

Next week, Brazil will announce the mid-month reading of its benchmark CPI along with the May reading of the broadest measure of inflation.

The combination of Brazil’s tight labor market and weaker currency is likely to limit the scope for further inflation deceleration from current levels, with inflation already close to consensus end-of-year expectations.

The IPCA-15 price index fell back below 4% last month after jumping more than 5% in September – which came just two months after it reached 3.19%, below the central bank’s 2023 target.

Also in Brazil, the central bank on Monday publishes its weekly survey of economists, with inflation expectations and interest rate expectations rising again, along with national unemployment, total outstanding loans, and budget balances.

Chile publishes six separate indicators for April, most notably unemployment, retail sales, industrial production and copper production.

Mexico’s light schedule will be dominated by the central bank’s publication of its quarterly inflation report, followed by a press conference hosted by Governor Victoria Rodriguez.

Banxico earlier this month raised its inflation forecast for the third quarter of 2025, while Wednesday’s report will reveal the bank’s revised GDP forecast.

Mexico’s labor market data for April is scheduled to be released on Thursday. Early consensus sees the unemployment rate rising from the record low of 2.28% recorded in March.

–With assistance from Robert Jameson, Piotr Skolimowski, Monique Vanek, and Laura Dillon Kane.

(Updates with Summit in Asia section)

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