Will US inflation fall further?

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Will US inflation fall further? 

Headline US consumer price inflation is expected to have slowed meaningfully in June but core inflation is likely to have remained robust, giving the Federal Reserve further incentive to resume raising interest rates at its July meeting. 

The Bureau of Labor Statistics on Wednesday will release its latest US consumer price index report, which is expected to show that headline inflation was 3.1 per cent in June, year over year, according to economists surveyed by Bloomberg. That would mark a significant improvement from May’s figure of 4 per cent, and would be the lowest rate since March 2021. 

But core CPI, a measure that strips out the volatile food and energy sectors, is expected to be 5 per cent year over year, just below the previous month’s rate of 5.3 per cent. Core inflation has remained stubbornly high, even as the headline figure has come down, and is likely to be more important to the Fed when it meets in late July. 

A core reading that is higher than — or falls in line with — economists’ expectations could cement the view that the Fed will resume raising interest rates again this month, after having paused in June for the first time since its historic rate increase campaign began in March last year. In the futures market, traders are pricing in an 89 per cent chance that the Fed will raise interest rates by a quarter point in July. Kate Duguid

How strong is the UK labour market?

In a busy week for UK economic data, investors are likely to be focused on Tuesday’s wage growth numbers.

That figure was unexpectedly strong last month, confounding expectations after a run of weaker data that indicated the labour market was slowing. As a result, markets and economists have pencilled in further interest rate rises.

Economists polled by Reuters forecast the annual growth rate of weekly earnings excluding bonuses was 7.1 per cent in the three months to May, just below the pace of 7.2 per cent in the previous period.

Ellie Henderson, an economist at Investec, also forecasts an uptick in overall earnings growth and said that “although vacancies are falling, they are still historically extremely elevated, giving employers more incentive to provide high pay awards to retain staff”.

She also expects a smaller rise in employment and a small gain in the single-month measure for the participation rate, based on the expectation that “the tougher financial conditions for households enticed even more people back to the labour market”. However, until job vacancies “return to more normal levels, the labour market will remain tight”, she said.

Samuel Tombs, an economist at Pantheon Macroeconomics, expects that growth in both employment and wages slowed in May, but that the trend “won’t be severe enough to stop the Monetary Policy Committee in its tracks”.

Markets are pricing in the Bank of England raising its bank rate from the current level of 5 per cent, the highest in 15 years, to 6.5 per cent by the end of December. Valentina Romei

Is Germany heading for a deeper recession?

Investors will be watching closely for signs of further deterioration of market confidence in Germany with the Leibniz Centre for European Economic Research, or ZEW, poised to publish its investor sentiment survey on Tuesday. 

Last month the gauge dropped 21.7 points to minus 56.5, a much bigger fall than economists had expected, and the biggest monthly fall since April 2020, at the start of the coronavirus pandemic. 

Economists polled by Reuters are expecting a further decline to minus 60. “If current conditions remain around these levels Germany could go into a deeper recession,” said George Buckley, a European economist at Nomura. 

Buckley said there had been encouraging signs this week with manufacturing orders stronger than economists had expected, up 6.4 per cent in May from a month earlier, but analysts said the number was driven by one-off items, with vehicle orders for ships and trains rising sharply.

The German economy has contracted for the past two consecutive quarters. In June, economists polled by Consensus Economics expected German gross domestic product to contract 0.2 per cent this year, a downward revision from the marginal expansion forecast in the previous month.

Germany will also publish June’s final inflation figures on Thursday. Flash figures showed German consumer prices rising 6.8 per cent for the year to June, slightly ahead of the 6.7 per cent forecast in a Reuters poll of economists. Mary McDougall