Finance
A small rebound in US inflation will not derail a Fed rate cut in September
(Bloomberg) — U.S. inflation likely rose modestly in July, but not enough to derail the Federal Reserve after a widely expected rate cut next month.
Most read from Bloomberg
The consumer price index is expected to have risen 0.2% on Wednesday compared to June, both for the nominal figure and for the so-called core gauge that excludes food and energy. While both would represent an acceleration from June, the annual numbers should continue to rise at one of the slowest paces since early 2021.
The recent easing of price pressures has boosted Fed officials’ confidence that they can start lowering borrowing costs while turning their attention to the labor market, which is showing greater signs of slowing.
The July jobs report showed that U.S. employers have substantially reduced workforces and the unemployment rate rose for a fourth month, triggering a key recession indicator and contributing to a global stock market sell-off.
Should the CPI come out as expected, it would indicate that inflation is still on a downward trend, and economists believe that a slight increase is on the way after June’s surprisingly low figures. They see the turnaround largely as a result of what are known as core services, with the exception of housing – a key category watched by policymakers. Some forecasters also point to an upside risk to commodity prices given higher shipping costs.
However, the long-awaited slowdown in shelter costs that began in June should continue. This category comprises about a third of the total CPI and is a major determinant of the broader inflation trend.
The producer price index – which is released a day before the CPI – will be closely scrutinized for categories that impact the Fed’s preferred inflation gauge, the personal consumption expenditure price index.
What Bloomberg Economics says:
“July’s CPI is likely to be weak, with the year-on-year change in the core CPI continuing to decline. Markets may rally around this news, but we think the implications for the Fed’s preferred price gauge – the core PCE deflator – will be more mixed when the CPI data is taken into account along with the PPI.”
—Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou and Chris G. Collins, economists. For a full analysis, click here
Another report next week is expected to show an increase in overall retail sales in July, but once certain components are removed to get through to the control group – which is used to calculate gross domestic product – sales could drop significantly have to slow down.
Other data on the agenda includes the latest figures on inflation expectations, small business sentiment, industrial production and new home construction. Regional Fed presidents Raphael Bostic, Alberto Musalem, Patrick Harker and Austan Goolsbee will speak.
Fed Governor Michelle Bowman said Saturday she still sees upside risks to inflation and continued strength in the labor market, signaling she may not be ready to support a rate cut when U.S. central bankers meet again in September .
Looking north, the start of residential construction in July will reveal whether the Bank of Canada’s successive interest rate cuts help stimulate investment in new construction. Canadian wholesale and manufacturing sales are expected to decline in June.
Elsewhere, key data in Britain on wages to inflation, manufacturing and retail figures from China, and likely decisions to keep interest rates unchanged in Norway and New Zealand are among the highlights.
Click here for what happened last week, and below is our summary of what’s going to happen in the global economy.
Asia
Thursday’s Chinese figures are likely to show that the economy did slightly better in July than in June, but is still largely limping.
Industrial production growth may have accelerated to 5.5%, a pace still slow enough to slightly drag down year-to-date figures.
The same goes for retail sales, which are expected to rise to 2.6%, while the seven-month pace is reduced to 3.5%. Investments in fixed assets remain stable, while the decline in real estate investments is expected to moderate.
The country’s credit growth is likely to have slowed in July, despite a cut in the People’s Bank of China policy rate and a cut in prime lending rates.
Elsewhere, Japan’s second-quarter GDP is expected to have recovered to 2.3% annual growth, with Taiwan and Kazakhstan also due second-quarter GDP figures.
Australia will release wage price, consumer confidence and NAB business confidence surveys on Tuesday.
India’s consumer inflation is expected to slow to below 4% in July, while industrial output growth may have slowed in June. Trade statistics are coming from India and Indonesia.
Among central banks, the Reserve Bank of New Zealand is expected to keep its official cash rate at 5.5% at Wednesday’s meeting, although a cut has not been ruled out. Central bankers in the Philippines meet a day later.
Europe, Middle East, Africa
Britain will take center stage, with four days of releases updating the Bank of England on the economy in the same month it made its first interest rate cut and signaled more to come.
Data on Tuesday likely to show slowing wage growth could be among the most important, although inflation the following day will also be watched for signs of continued pressure – particularly the services sector gauge that could come in as price growth still remains above 5%.
Monthly GDP is forecast to show little growth on Thursday in June, although second quarter output, expected on the same day, could show 0.6% growth. On Friday, retail sales for July are likely to show an increase after a decline the month before.
The Scandinavian countries are also likely to attract attention, especially Norway. Norges Bank is expected to keep its interest rate at 4.5% on Thursday, in line with a more aggressive stance from June, when officials effectively postponed monetary easing until 2025.
Core inflation has fallen faster this year than officials forecast, but the energy-rich economy has also coped better than expected with the highest credit costs since 2008; Wage pressure remains high and the labor market has only marginally softened.
Against that backdrop, investors will be watching for signs of concern about the krone, the Group of 10’s worst-performing currency so far this year.
In Sweden, data on Wednesday will show whether underlying inflation in the largest Scandinavian economy continued to slow in July. That will provide important evidence for policymakers who are widely expected to implement monetary easing this month, after previously announcing as many as three interest rate cuts in the second half of the year.
Inflation figures will also be published on Monday in Denmark and the Czech Republic, while second-quarter GDP figures will be released on Wednesday in Poland and Thursday in Switzerland.
The eurozone will have a relatively quiet week. Tuesday’s German ZEW investor confidence index, along with eurozone industrial production and Wednesday’s Dutch GDP, are among the key quotes. European Central Bank officials are largely on vacation, and much of southern Europe will be off on Thursday.
To the south, Zambia is set to raise interest rates for the seventh consecutive time on Wednesday to curb double-digit inflation and support the kwacha.
On the same day, Namibia will keep its interest rate at 7.75%, in line with South Africa’s unchanged position last month. The Namibian dollar is pegged to the rand, which means that monetary policy is often guided by the actions of the South African Reserve Bank.
Nigerian data is likely to show on Thursday that inflation has eased for the first time in 19 months, helped by favorable annual comparisons and measures to cut food costs, including a 180-day period to import wheat and maize duty-free.
Also on Thursday, Israeli inflation is likely to accelerate to 3.1% in July, forecasts show, as the war in Gaza puts pressure on the economy and government spending soars. That result would exceed the 1% to 3% target for the first time since November.
Latin America
Argentina will soon release inflation data for July, and economists surveyed by the central bank see the monthly rate slowing to 3.9% from 25.5% in December. Annual inflation could slow for a third month, to around 263%.
Also from Argentina, the Ministry of Economy will report its budget balance for July, which is currently in a six-month series of surpluses.
The central banks of Brazil, Colombia and Chile will release surveys on economists’ expectations next week. Chile also publishes a separate poll of traders, who rightly mentioned the July 31 interest rate pause by Banco Central de Chile.
Uruguay’s new central bank president, Washington Ribeiro, and his colleagues could keep their policy rate at 8.5% after inflation rose slightly to 5.45% in July. Inflation has been within the bank’s target range of 3% to 6% over the past fourteen months.
Brazil, Peru and Colombia will report June GDP data, while Colombia will also publish April-June production figures.
All three economies grew faster than expected in April and May, ensuring positive growth transmission for the entire second quarter.
Since the slump in mid-2023, the Colombian economy has posted quarter-on-quarter declines of 1% and 1.1%. Year-over-year forecasts range from 2.8% to 3.3%.
–With help from Irina Anghel, Robert Jameson, Brian Fowler, Ott Ummelas, Laura Dhillon Kane, Monique Vanek, Paul Wallace and Niclas Rolander.
(Updates with Bowman in 10th paragraph)
Most read from Bloomberg Businessweek
©2024 BloombergLP
