The Fed’s Favorite Underlying Inflation Gauge Is Cooling

(Bloomberg) — The Federal Reserve’s top-tier inflation gauge is poised to show some modest relief from persistent price pressures, underscoring central banks’ prudence about the timing of interest rate cuts.

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Economists expect the price index for personal consumption expenditures minus food and energy – forecast for Friday – to rise 0.2% in April. That would represent the smallest advance so far this year for the measure, which provides a better picture of underlying inflation.

The overall PCE price index likely rose 0.3% for a third month, according to the median projection in a Bloomberg survey. The increases this year contrast with relatively stable readings in the final three months of 2023, underscoring the Fed’s uneven progress in its fight against inflation.

Fed Chairman Jerome Powell and his colleagues have emphasized the need for more evidence that inflation is on a sustained path toward the 2% target before cutting the benchmark interest rate, which is at its highest level in two years. decades since July.

The PCE price measure is expected to rise 2.7% on an annual basis, while the main metric is expected to be 2.8% – both matching the previous month’s levels.

Earlier this month, authorities rallied around the desire to keep interest rates higher for longer and “many” questioned whether the policy was restrictive enough to reduce inflation to its target, according to the minutes. from your last meeting.

Read more: Minutes show officials rallying around higher rates for longer

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

What Bloomberg Economics Says:

“The report will likely provide some encouraging signs that the disinflation process has not completely stalled. With income growth slowing in a cooling labor market, consumers are gradually giving in, which should provide a continued disinflationary boost for the rest of the year. However, with price recovery pressures still brewing, inflation is likely to moderate only very gradually this year.”

—Anna Wong, Stuart Paul, Eliza Winger, and Estelle Ou, economists. For full analysis, click here

Other data for the week includes revised first-quarter gross domestic product on Thursday. Economists predict that growth has likely slowed from the government’s initial estimate. The Fed will publish its Beige Book summary of economic conditions across the country on Wednesday.

The story continues

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

Looking north, Canada will release gross domestic product data for the first quarter. Declining monthly momentum in March and weak domestic demand would likely keep a June rate cut in play for the central bank.

Elsewhere, a likely recovery in inflation in the eurozone, Chinese industrial data and PMI numbers, as well as price reports from Brazil will be among the highlights.

Click here to find out what happened last week and below is the summary of what’s to come in the global economy.

Asia

China’s manufacturing sector will be in the spotlight next week. Monday’s industrial data will show whether profits recovered in April, after a sharp pullback in March dragged the pace of earnings in the first three months to 4.3%.

Persistent deflation in producer prices and weak domestic demand could keep profitability under pressure. China receives its official manufacturing PMI data on Friday, with a focus on whether the indicator remains 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 advance in April.

Consumer inflation in Tokyo could increase slightly in May, foreshadowing gains for national numbers.

Meanwhile, China called on South Korea to maintain stable supply chains as the countries began their first tripartite summit with Japan since 2019.

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

Vietnam also releases CPI data along with industrial production, retail sales and trade during the week.

At the central bank, Kazakhstan sets its reference policy rate on Friday.

Europe, Middle East, Africa

In the euro zone, inflation probably accelerated in May to 2.5%, according to economists’ forecasts. An underlying indicator is forecast to have stopped weakening for the first time since July, holding at 2.7%.

In line with broader euro zone data, national releases beginning with Germany’s on Wednesday are expected to have gone in the wrong direction in three of the region’s four biggest economies. Only Italy records slower price growth.

Such results impede progress towards the ECB’s 2% target, but consistent signals from officials for a quarter-point rate cut on June 6 make it unlikely that a month of data will derail them. Still, some policymakers argue against any rush for greater flexibility.

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

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

ECB officials scheduled to speak next week include chief economist Philip Lane and the Dutch, French and Italian governors. A pre-decision blackout period begins 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 4 July.

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

Several monetary decisions are scheduled across the region:

• Israel’s central bank is expected to hold its key rate steady at 4.5% on Monday, largely to keep war-related inflationary pressures in check and provide support for the shekel. Governor Amir Yaron is afraid of easing monetary policy and further increasing the difference between borrowing costs in Israel and the US.

• Ghana’s monetary authority is expected to maintain its key rate at 29% on Monday to beat persistent inflation and support its struggling currency.

• On Wednesday, Mozambique’s policymakers are poised to reduce borrowing costs, with consumer price growth expected to remain in the single digits for the rest of the year.

• And on Thursday – a day after elections in which the ruling African National Congress risks losing its majority – South African monetary authorities are expected to maintain their base rate at 8.25%, with the inflation has yet to return to the 4.5% midpoint of its target range.

Latin America

Brazil will release the mid-month reading of its benchmark consumer price index next week, along with the May reading of its broader measure of inflation.

The combination of Brazil’s tight labor market and weaker currency will likely limit the scope for further disinflation relative to current levels, with inflation already approaching consensus year-end forecasts.

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

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

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

Mexico’s light calendar 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 set its inflation forecasts through the third quarter of 2025, while Wednesday’s report will reveal the bank’s revised GDP forecasts.

On Thursday, Mexico’s labor market data for April will be released. The initial consensus predicts that the unemployment rate will rise from the historic low of 2.28% recorded in March.

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

(Updates with Israel released in the EMEA section)

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