Will US inflation signal a need for further rate rises?

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Investors will be picking through US inflation data next week for signs that the Federal Reserve is on track to bring inflation back to its long-term target.

This week chair Jay Powell warned the central bank still had “a long way to go” in its battle to curb rising prices and bring inflation to a rate of two per cent.

The latest Bureau of Labor Statistics data on consumer prices, due on Tuesday, is expected to show headline inflation cooled to a rate of 3.3 per cent in the year to October, according to economists polled by Bloomberg. That would mark a significant easing from a headline rate of 3.7 per cent in September.

Analysts at Bank of America expect the easing of the headline rate to be driven primarily by a drop in petrol prices. Core inflation, which strips out volatile food and energy prices, is expected to have eased to 0.1 per cent month on month, compared with 0.4 per cent in September.

Any signs that inflation is more persistent than expected could derail a widely held view that the Fed has finished its rate-rising campaign.

After the Fed’s latest policy meeting Powell said it would proceed “carefully” with future interest rate decisions, which the market took as a sign that it may have finished lifting rates.

But he later warned against the risk of being “misled” by good data on prices. Swaps markets are pricing a 90 per cent probability that the Fed will keep rates on hold at its next meeting, with the first cut almost fully priced in for next June. Mary McDougall

Will UK inflation fall below 5 per cent?

The UK inflation rate is expected to drop sharply on Wednesday but investors will be looking closely for firmer signals that price pressures are still easing.

The data offers insight into the outlook for the UK economy after mixed messages from Bank of England officials on the outlook for interest rates.

Economists polled by Reuters expect the headline annual rate will fall to 4.9 per cent after it held steady at a rate of 6.7 per cent last month. The drop will largely reflect a reduction in the energy price cap set by regulators.

But investors will be looking beyond the headline rate to core inflation, which strips out volatile food and energy prices.

Economists expect core inflation to ease to a rate of 5.8 per cent from 6.1 per cent last month. Investors will be particularly looking for a slowdown in services inflation, which is closely monitored by the central bank.

“We expect to see evidence that underlying services CPI is slowing, and more rapidly than the [Monetary Policy Committee] anticipates,” said Samuel Tombs at Pantheon Economics. “We expect next week’s CPI report to endorse the recent decline in markets’ interest rate expectations.”

Swaps markets are now betting the central bank has finished raising interest rates and are pricing in close to three interest rate cuts next year, up from one cut as recently as September.

This week BoE chief economist Huw Pill said market expectations for rate cuts next summer were “not unreasonable” but governor Andrew Bailey followed up saying it was “far too early” to start talking about when rates could be cut.

A day earlier, traders will pour through labour market data on Tuesday for signs of higher interest rates affecting jobs. Economists polled by Reuters expect the unemployment rate to nudge up from 4.2 per cent to 4.3 per cent and average earnings excluding bonuses to remain at an annual rate of 7.8 per cent. Mary McDougall

Will Chinese consumer demand rebound?

Chinese consumer demand has remained consistently weak this year even though Beijing has loosened the strict curbs on its citizens to combat Covid-19. Retail sales figures, released on Wednesday, will be closely watched for insights into the country’s tepid rebound.

October economic data was inconclusive. Imports expanded for the first time since February, indicating strengthening domestic demand, but exports declined for a sixth consecutive month.

Weaker than expected manufacturing data may also dim confidence, while plunging pork prices and a slip back into deflation suggest there is more work to be done to revitalise consumers’ spirits and stimulate spending.

Analysts polled by Bloomberg expect retail sales to have grown 7 per cent in October compared with a year earlier, the fastest expansion since May. However, the figures six months ago were also skewed by comparisons with spring 2022 when China was under another intense coronavirus lockdown.

BofA analysts said October’s deflation figures, when consumer prices declined 0.2 per cent year on year, “underscore fragile consumption and investment demand”.

Underscoring the fragility of China’s economy has been weakening exports and manufacturing data. Analysts at Nomura argued the indicators mean it is “too early to call the bottom”. William Langley