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Investors will be watching the Federal Reserve’s preferred inflation gauge for clues about whether price rises are accelerating in the world’s biggest economy.
Next week’s PCE, or personal consumption expenditures price index, is expected to echo recent measures that have signalled higher inflation in April, as the war in Iran drove up energy prices.
Core prices, which exclude the volatile food and energy sectors and are the Fed’s preferred measure of underlying price pressures, will be most crucial to the central bank’s thinking. Economists are forecasting a 3.4 per cent annual rise, which would be the highest since mid-2023.
Should the data show broad inflation pressures, “the Fed’s ability to characterise it as transitory or energy-driven becomes harder to defend”, said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “The totality of recent inflation and consumer sentiment data suggests we are likely headed down the wrong road, in our view.”
Rising core prices will become especially tricky for central bankers if consumers’ longer-term expectations for inflation also drift higher, which could spur the Fed to lift interest rates later this year.
Such a shift in expectations would present “a dilemma for new Fed chair Kevin Warsh who was nominated by [Donald] Trump because of his stated view that US rates should be lower,” said Nick Brooks, head of economic and investment research at ICG. Jill R Shah
How fragile is Japanese consumer confidence?
After successive steep drops in Japanese consumer sentiment in March (down 6.4 points) and April (down a further 1.1 points), few economists are expecting a serious rebound from the current level of 32.2 in the latest survey, due on May 29. Goldman Sachs is forecasting a further decline to 31.5.
The Iran war has exposed the vulnerabilities of Japan’s import-dependent industrial base and there is still an open question of whether the economy can avoid a severe hit to growth from shortages of crucial commodities.
Despite that, a packed week of economic releases — including the unemployment rate, housing starts and Tokyo CPI — could bolster market bets that the Bank of Japan will push ahead with an interest rate increase in March.
Japan’s government has been generous in its subsidies on gasoline, shielding consumers from the most severe effects of the Iran war and crude oil price surges. Even so, analysts warn that sentiment remains fragile.
Consumers still fret that the knock-on effects of higher energy and crude prices will quickly feed into all prices. Core-core CPI, which strips out energy and fresh food, rose 1.9 per cent in April — lower than the BoJ’s 2 per cent target, but high for households still getting to grips with the return of steadily rising prices after the country’s long deflationary episode. Leo Lewis
Will German inflation remain below 3%?
After shooting up to just below 3 per cent in April, inflation in Europe’s largest economy in May will be closely watched on Friday, offering an early indication of the price pressures that policymakers at the European Central Bank are facing.
Economists polled by Reuters expect inflation to remain at 2.9 per cent, the same level as reported last month — but a move above 3 per cent could help cement the case for higher borrowing costs in the euro area.
The 27 members of the ECB’s governing council are widely expected to increase interest rates by a quarter point to 2.25 per cent at their next meeting on June 11 in what would be the first rate rise since September 2023. Traders have priced in an 84 per cent probability of such a move and expect a second quarter-point increase by the end of the year.
Higher interest rates would hit the German economy during a bout of weakness as more than three years of de facto stagnation drag down the labour market. Economists expect the number of unemployed, which will also be reported on Friday, will continue to hover above the politically sensitive level of 3mn in seasonally adjusted terms for the second month in a row, the highest level in 15 years. On average, economists polled by Reuters expect that an additional 10,000 people will have lost their jobs in April.
“German GDP is likely to contract in the second quarter,” warned Commerzbank chief economist Jörg Krämer in an email to clients on Friday, adding that economic risks were increasing “with each additional day that the Strait of Hormuz remains closed”. Olaf Storbeck
