Small increase 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 from a widely anticipated rate cut next month.

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Wednesday’s consumer price index is expected to have risen 0.2 percent from June for both the headline figure and the so-called core gauge, which excludes food and energy. While each would be an acceleration from June, annual numbers should continue to rise at some of the slowest rates seen since early 2021.

The recent easing of price pressures has bolstered Fed officials’ confidence that they can begin to lower borrowing costs as they refocus their attention on the labor market, which is showing greater signs of slowing.

July’s jobs report showed that US employers substantially cut hiring and the unemployment rate rose for a fourth month, triggering a key recession indicator and contributing to a global stock market sell-off.

If the CPI comes in as expected, it would indicate that inflation remains on a downward trend, and economists believe a slight increase is due after June’s surprisingly low reading. They see the reversal stemming largely from what are known as basic services, excluding housing — a key category watched by policymakers. Some forecasters also signal an upside risk to commodity prices given shipping costs.

However, the long-awaited slowdown in housing costs that began in June should continue. This category comprises about a third of the overall CPI and is a determinant of the broader inflation trend.

The producer price index — due one day before the CPI — will be analyzed for categories that are transmitted by the Fed’s preferred inflation gauge, the price index for personal consumption expenditures.

What Bloomberg Economics Says:

“July’s CPI is likely to be weak, with the year-on-year change in core CPI declining. Markets may react around this news, but we think the implication for the Fed’s preferred price gauge – the core PCE deflator – will be more mixed when the CPI data is considered together with the PPI.”

—Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou, and Chris G. Collins, Economists. For a full review, click here

Another report next week is expected to show a rise in global retail sales in July, but once certain components are stripped out to break out the control group – which is used to calculate gross domestic product – sales should fall considerable.

The story continues

Other data on the agenda includes the latest readings on inflation expectations, small business sentiment, industrial production and new home construction. Fed regional presidents Raphael Bostic, Alberto Musalem, Patrick Harker and Austan Goolsbee are scheduled to speak.

Speaking on Saturday, Fed Governor Michelle Bowman said she still sees rising risks to inflation and continued strength in the labor market, signaling she may not be ready to back an interest rate cut at the next US central bankers meeting in September .

Looking north, housing starts for July will reveal whether back-to-back cuts in the Bank of Canada’s rate are helping to boost investment in new construction. Canadian wholesale and manufacturing sales for June are expected to decline.

Elsewhere, key UK data from wages to inflation, manufacturing and retail figures from China and likely decisions to keep rates unchanged in Norway and New Zealand are among the highlights.

Click here for what happened in the past week, and below is our list of what’s happening in the global economy.

Asia

China’s burst of data on Thursday will likely show the economy fared slightly better in July than in June, but is still largely limping along.

Industrial production growth may have accelerated to 5.5%, a pace that is still slow enough to slightly reduce the year-to-date number.

The same is true for retail sales, which rose 2.6 percent, while the seven-month pace falls to 3.5 percent. Investment in fixed assets is seen as holding steady, while the decline in real estate investment is forecast to be moderate.

Domestic credit growth likely slowed in July despite a key rate cut by the People’s Bank of China and a cut in prime lending rates.

Elsewhere, Japan’s second-quarter GDP is expected to have rebounded to 2.3% annualized expansion, with Taiwan and Kazakhstan also reporting second-quarter GDP numbers.

Australia will release figures on wage prices, consumer confidence and the NAB business confidence survey on Tuesday.

India’s consumer inflation is expected to fall below 4% in July, while industrial production growth may have slowed in June. Trade statistics are due from India and Indonesia.

Among central banks, the Reserve Bank of New Zealand is expected to keep its official cash rate at 5.5% when it meets on Wednesday, although a cut has not been ruled out. Philippine central bankers meet a day later.

Europe, Middle East, Africa

Britain will take center stage, with four days of statements from the Bank of England to update on the economy, in the same month that it offered an initial interest rate cut and signaled more to come.

Tuesday’s data, which could show a slowdown in wage growth, could be among the most significant, although inflation the next day will also be watched for evidence of lingering pressures – particularly the services measure that could emerge with price growth still stuck over 5%

Thursday’s monthly GDP is expected to reveal almost no growth in June, although second-quarter output due on the same day could show a 0.6 percent expansion. On Friday, retail sales are likely to show an increase for July after a decline the previous month.

The Nordics are also likely to attract attention, especially Norway. Norges Bank is expected to hold its rate at 4.5 percent on Thursday, in line with a more hawkish stance taken in June, when officials effectively delayed monetary easing until 2025.

Core inflation has slowed this year faster than officials expected, but the energy-rich economy has also coped better than expected with the highest borrowing costs since 2008; wage pressures remain high, and the labor market has decreased only marginally.

Against this backdrop, investors will be looking for any signs of concern about the krona, the worst performing of the Group of 10 currencies this year.

In Sweden, data on Wednesday will show whether core inflation in the largest Nordic economy continued to fall in July. That will provide key evidence for policymakers, who are widely expected to ease monetary policy this month after previously signaling up to three rate cuts in the second half of the year.

Inflation figures will also be released on Monday in Denmark and the Czech Republic, while Q2 GDP figures are due in Poland on Wednesday and Switzerland on Thursday.

The Eurozone will have a relatively quiet week. Germany’s ZEW investor confidence index on Tuesday, along with euro zone industrial production and Dutch GDP on Wednesday, are among the main items due. European Central Bank officials are largely on vacation, and much of southern Europe will be shut down on Thursday.

Turning south, Zambia is set to raise rates for a seventh straight time on Wednesday to reduce double-digit inflation and support the kwacha.

On the same day, Namibia is set to hold its rate at 7.75%, in line with South Africa’s unchanged position last month. The Namibian dollar is pegged to the rand, meaning that monetary policy is often guided by the actions of the South African Reserve Bank.

Nigerian data on Thursday is likely to show inflation fell for the first time in 19 months, helped by favorable annual comparisons along with measures to reduce the cost of food, including a 180-day window to import duty-free wheat and maize.

Also Thursday, Israeli inflation likely rose to 3.1 percent in July, forecasts showed, as the war in Gaza strains the economy and government spending rises. That result would exceed the target range of 1% to 3% for the first time since November.

latin america

Argentina is due to report July inflation data, and economists polled by the central bank see the monthly figure falling to 3.9 percent from 25.5 percent in December. Annual inflation could slow for a third month to around 263%.

Also from Argentina, the Economy Ministry will report its July budget balance, currently on a six-month streak of surpluses.

The central banks of Brazil, Colombia and Chile release surveys of economists’ expectations next week. Chile also publishes a separate survey of traders, which correctly named the Banco Central de Chile’s July 31 rate break.

Uruguay’s new central bank chief Washington Ribeiro and his colleagues may keep the key 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 14 months.

Brazil, Peru and Colombia will report June GDP proxy data, with Colombia also releasing April-June output figures.

All three economies expanded faster than expected in April and May, delivering positive growth carried over for the entire second quarter.

Since collapsing in mid-2023, Colombia’s economy has subsequently posted quarterly prints of 1% and 1.1%. Annual forecasts range from 2.8% to 3.3%.

–With assistance 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)

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