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Eurozone inflation has been gliding gently downwards for the past four months. But some analysts think price pressures will pick back up again this month, which could cause the European Central Bank to adopt a more cautious approach to cutting interest rates.
Consumer prices in the single currency bloc are expected to be 2.5 per cent higher in May than they were a year ago, a slight acceleration from 2.4 per cent a month earlier, according to a Barclays forecast of what the data will show when it is released on Thursday.
“Unfavourable base effects in energy will be the primary tailwind for headline inflation, pushing it to accelerate slightly,” said Mark Cus Babic, an economist at Barclays, adding that services inflation could tick up due to last year’s launch of subsidised German train tickets.
The figures come just a week before the ECB is widely expected to start lowering borrowing costs on June 6.
ECB president Christine Lagarde said last week there was “a strong likelihood” of a cut at its next meeting and most analysts believe it would take a massive surge in inflation to delay it. But other policymakers have warned that higher inflation readings will make the central bank less likely to follow up with another cut in July.
“The ECB will probably deliver a first rate cut at its June 6 meeting but then pause in July, on the back of sticky wages but also services inflation, which we expect to remain elevated on a sequential basis in May, not least due to base effects in Germany,” said Frederik Ducrozet, an economist at Pictet Wealth Management. Martin Arnold
How healthy is China’s manufacturing sector?
Chinese factory data, released on Friday, will shed further light on the trajectory of the world’s second-largest economy after a period of heightened focus on its manufacturing sector.
President Xi Jinping’s government has emphasised the need for “high-quality production”, from electric vehicles to artificial intelligence, at a time when broader economic momentum and business confidence have come under pressure.
The official purchasing managers’ index, a gauge of manufacturing activity, is expected to have edged higher to 50.5 in May, according to economists’ forecasts compiled by Reuters. The index slowed in April to 50.4. A reading above 50 represents expansion compared with the previous month.
A separate survey from Caixin showed factory activity expanding last month at the fastest pace in 14 months, at a level of 51.4.
Economic data released in mid-May showed that industrial production last month beat forecasts to rise 6.7 per cent year on year, though a real estate slowdown that began in 2021 continued to weigh on the economy. Exports returned to growth in April after a year-on-year decline in March.
Carlos Casanova, senior economist for Asia at UBP, noted recent economic data that “strong manufacturing output likely supported activity in April”, but added that, based on weak retail sales and investment, “the nature of China’s recovery remains lopsided”.
The data will be closely watched in the US, where President Joe Biden this month placed tariffs of 100 per cent on Chinese electric vehicle imports, and in Europe where policymakers have launched a probe into subsidies for the production of the vehicles. Thomas Hale
Will the Fed’s favoured metric show progress on inflation is stalling?
The Federal Reserve’s preferred measure of inflation is expected to show that prices in April rose at the same pace as March, despite a slowdown evident in the consumer price index last month.
The Bureau of Economic Analysis will release on Friday the personal consumption expenditures index data for April. Economists surveyed by Bloomberg forecast a 2.7 per cent year-over-year rise in the index, unchanged from the prior month. The core measure, which strips out the volatile food and energy sectors and is most closely watched by the Fed, is expected to be 2.8 per cent, also unchanged from March.
The PCE data will come in the wake of cooling inflation evident in April’s consumer price inflation figures. While April’s CPI data was still far above the Fed’s 2 per cent inflation target, the slowdown — after months of stronger-than-expected numbers — was a welcome relief for the market.
The PCE data will not reflect the same improvement, if the forecasts prove correct. But analysts argue that unchanged PCE data probably will not change the optimistic tone that has infused markets since the CPI data.
“Despite core PCE’s status as the Fed’s preferred measure of inflation, we’re less convinced it will change the market’s prevailing perception of the pace of consumer price inflation as the second quarter got under way,” said Ian Lyngen, head of US interest rate strategy at BMO Capital Markets. “In short, investors are cautiously optimistic that the Fed’s characterisation of the first quarter as a bump in the road towards cooling inflation is, in fact, an accurate read.” Kate Duguid
