What to watch in this week’s US and UK inflation readings
This week’s inflation prints in the US and UK will be crucial as markets reassess their forecasts for interest rate policy in both countries.
UK and US inflation on the calendar this week
Upcoming inflation reports for the US and UK are set to take centre stage this week, coming at a vital time for financial markets. After a weak US jobs report triggered a global stock sell-off, investors are keenly focused on these economic indicators.
US inflation expectations
The US Consumer Price Index (CPI) data, scheduled for release on Wednesday, is expected to show an annual inflation rate of 3% for July, unchanged from the previous month. However, core inflation, which excludes volatile food and energy prices, is anticipated to decrease slightly to 3.2% from 3.3% in June.
An unexpected increase in inflation could lead to fresh market volatility, boosting the US dollar and putting further pressure on stocks after their recovery from last Monday’s lows, as investors revive down their expectations of a robust interest rate cut from the Federal Reserve (Fed) in September.
Federal Reserve rate cut predictions
Following the recent jobs report, investors increased their bets on Fed rate cuts. Current market expectations suggest a full percentage point reduction in interest rates this year, implying a substantial half-point cut at one of the Fed's remaining three meetings. The central bank's benchmark rate currently stands at a 23-year high of 5.25% to 5.5%.
However, as the markets have calmed following last week’s volatility, some of the more exuberant forecasts have been trimmed back. Markets had priced in a near 100% chance of a 50bps rate cut in September, but that has now dropped to below 50%. Just as a stronger inflation report might see the dollar rise on expectations of a less dovish Fed, a weaker inflation report could send the dollar lower and give stocks a boost.
UK inflation and Bank of England considerations
In the UK, July's inflation data will be closely watched following the Bank of England's (BoE) recent decision to cut interest rates. Economists forecast a slight increase in annual consumer price inflation to 2.3%, primarily due to rising energy costs. This would end two months of inflation meeting the BoE's 2% target.
Services inflation, a key measure of domestic price pressures, is expected to slow marginally to 5.5% from 5.7% in June. This figure remains a focal point for BoE policymakers, as it influenced some members to advocate for maintaining higher interest rates for an extended period.
Market implications and central bank caution
The upcoming inflation reports could significantly impact market sentiment and central bank policies. In the US, any signs of resurgent inflationary pressures may unsettle markets that have become highly sensitive to economic data.
The BoE’s rate cut in early August is likely to have been the only one for the time being – policymakers in the UK remain sceptical that inflation has been brought under control, and this week’s inflation print may well put paid to any idea of another cut in the near future.
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