Economic preview: US and eurozone inflation update

Inflation forms the backbone of this week’s economic data releases, with updates on price rises in the US and eurozone – both published on Friday.

US inflation data has looked a little spineless in recent months and has caused some concerns for the Federal Reserve on its path to monetary policy normalisation.

In the eurozone, inflation is also running below target as the strong euro saps any price growth out of imported goods.

US personal consumption expenditures (PCE)

PCE, as often stated here, is the Fed’s preferred measure of inflation and in July, the core PCE price index dropped to an annual rate of 1.4%, down from 1.5% in June.

The Fed said in its policy statement last week, as it held its main Fed funds rate at 1-1.25%, that it now expects inflation to remain below its 2% target until 2019.

The central bank sees core PCE peaking at 1.9% at the end of 2018, lowering its forecast from a previous 2% peak, before labour market tightness works its way through to wage increases, growth in consumer spending and thus higher prices.

The Fed has downplayed low inflation and is still expected to raise rates again this year – Source: Pexels

Hitherto, the Fed has downplayed low inflation and is still expected to raise interest rates in December and three further hikes in 2018.

The Fed is more concerned about loose financial conditions and the formation of asset price bubbles than temporarily low inflation

by Kamal Sharma at Bank of America Merrill Lynch

Analysts expect core PCE for August, published on Friday, to remain at 1.4%.

Eurozone consumer price index (CPI)

Likewise, eurozone inflation has remained stubbornly low but, unlike the US, it has a strong currency protecting it against import prices.

In August, the annual rate of CPI rose to 1.5% from 1.3% in the prior month as fuel prices applied the most upward pressure.

With oil prices up a further 7% since the August inflation data, it’s highly likely the preliminary September reading, published on Friday, will have either risen or, at least, stayed put.

All other anecdotal evidence points to higher prices, also. Purchasing manager index data last week all came in above forecasts, consumer confidence hit a 16-year high and wages are increasing.

“This rounds out a run of data that provide evidence of building pipeline inflation pressures,” says Bert Colijn at ING.

UK consumer credit and net lending to individuals

Although UK unemployment is at its lowest level in decades, fears of Brexit-related and other domestic political uncertainties have kept a lid on wage growth as employers remain thrifty in the face of these risks.

Given this squeeze on household finances, rises in retail sales have come at the expense of consumer credit growth and other forms of personal lending.

credit cardsConsumer credit grew by 9.8% in July and is expected to remain close to 10% in August – Source: Shutterstock

In July, the annual growth rate of consumer credit dropped below 10% for the first time since April 2016, falling to 9.8% and representing a total consumer credit bill of £201.5bn.

Net lending to individuals, which includes mortgages, lending secured on dwellings and other forms of secured lending, rose by £4.8bn in July, pushing the annual rate of growth in net lending to 4% from 3.9% in the prior month.

Both measures of borrowing are expected to rise in August’s data, published on Friday.

US durable goods

Durable goods orders for August are expected to have recovered from last month’s dramatic-looking fall.

The data has been skewed in the last few months, however, when – in June – Boeing received a massive order for 200 aircraft at the Paris Air Show. The abnormal June rise was followed by 6.8% fall in July.

More normal conditions are expected to have prevailed in August, and analysts expect orders to have risen by 1.5% when the data is published on Wednesday.

The best of the rest

German business conditions in September, as measured by the influential IFO economic institution, are expected to have remained buoyant.

In August, after previously hitting three record highs in three consecutive months, business confidence in the eurozone’s biggest economy dipped fractionally, with the index falling to 115.9 from 116 in July. Monday’s data is expected to show similar levels to August.

On Wednesday, the UK’s final reading of second-quarter gross domestic product is published, with the most recent findings on retail and housing sales and business spending. No revisions to the 0.3% monthly advance and the annual growth rate of 1.7% are expected.

The final reading of US second-quarter growth follows on Thursday and the are no revisions expected to its annual rate of 3%.

Finally, there are plenty of regional US manufacturing and other business activity surveys published this week: Chicago Fed and Dallas Fed both on Monday; Kansas Fed on Thursday and Chicago PMI on Friday.

Corporate reports

Among the corporate highlights this week in the US are: Monday, quarterly results from cruise operator Carnival; Tuesday sees earnings from sports gear maker Nike and embattled retailer Toys R Us and on Wednesday, it’s Pier 1 Imports.

In the UK: Monday’s results are from Scottish soft drinks maker AG Barr and roadside resuce and insurance firm AA; Thursday it’s gentleman’s outfitter Moss Bros and on Friday support services group Carillion reports.

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