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Euro zone inflation has been falling slowly for the past four months, but some analysts say price pressures could rise again this month and prompt the European Central Bank to be more cautious in cutting interest rates.
Barclays forecasts what will be shown in data released on Thursday that consumer prices in the single currency area are expected to rise 2.5 percent year-on-year in May, accelerating slightly from 2.4 percent the previous month.
“Negative base effects from the energy sector will provide a tailwind for headline inflation, leading to a slight acceleration,” said Mark Kass-Babic, an economist at Barclays, adding that rail subsidies introduced in Germany last year could lift services inflation.
The figures were released just a week before the ECB is widely expected to start cutting borrowing costs on June 6.
ECB President Christine Lagarde said last week that a rate cut was “highly likely” at the bank's next meeting, and most analysts believe a big rise in inflation would be needed to delay a cut, but other policymakers have warned that rising inflation readings make it unlikely the ECB will make another rate cut in July.
“The ECB will probably cut rates for the first time at its meeting on June 6, before pausing cuts in July,” said Frederic Ducrozet, economist at Pictet Wealth Management. “This is due to persistently high wages and services inflation, which we expect to remain high month-on-month in May, driven in particular by base effects in Germany.” Martin Arnold
Is China's manufacturing sector healthy?
China's manufacturing data released on Friday will shed more light on future developments in the world's second-largest economy after a period of increased focus on manufacturing.
President Xi Jinping's government has stressed the need for “high-quality production” of everything from electric vehicles to artificial intelligence at a time when broader economic momentum and business confidence are under pressure.
The official purchasing managers' index, a gauge of manufacturing activity, is expected to edge up to 50.5 in May, according to economists' forecasts compiled by Reuters. The index slowed to 50.4 in April. A reading above 50 means expansion from the previous month.
A separate Caixin survey showed manufacturing activity expanded to 51.4 last month, the highest level in 14 months.
Economic data released in mid-May showed industrial production rose 6.7% year-on-year last month, beating expectations, but a slowdown in the real estate market that began in 2021 continued to weigh on the economy. Exports picked up in April after declining year-on-year in March.
Carlos Casanova, senior Asia economist at UBP, said recent economic data “suggested that strong manufacturing production supported economic activity in April,” but added that “China's recovery remains uneven” given weak retail sales and investment.
The data will be closely watched in the United States, where President Joe Biden this month imposed a 100% tariff on electric vehicle imports from China, and in Europe, where policymakers have launched investigations into subsidies for electric vehicle production. Thomas Hale
Will the Fed's preferred indicators show inflationary progress stalling?
The Federal Reserve's preferred inflation gauge is expected to show that prices rose at the same pace in April as in March, despite a clear slowdown in last month's consumer price index.
The Bureau of Economic Analysis will release personal consumption expenditures data for April on Friday. Economists surveyed by Bloomberg expect the index to rise 2.7% from a year ago, unchanged from the previous month. The core measure that excludes the volatile food and energy sectors and is the Fed's most closely watched is expected to rise 2.8%, unchanged from March.
The PCE data comes on the heels of a slowdown in inflation revealed in the April Consumer Price Index. While the April CPI data was still well above the Fed's 2% inflation target, the slowdown came as a welcome relief to markets after several months of better-than-expected readings.
If the forecast proves correct, the PCE data will not reflect a similar improvement, but analysts argue that without the PCE data, the optimistic mood that has permeated the market since the CPI data will likely remain unchanged.
“Despite core PCE being the Fed's preferred inflation measure, we're not convinced it will change the market's general perception of the pace of consumer price inflation as the second quarter begins,” said Ian Lingen, head of U.S. rates strategy at BMO Capital Markets. “In essence, investors are cautiously optimistic that the Fed is in fact correct in positioning the first quarter as a roadblock on the path to containing inflation.” Kate Duguid
