US inflation takes centre stage as markets get to see if the economy is still exceptional, with another upside surprise in the price data. The “Goldilocks” theme – not too hot, not too cold – has been upended in recent months with economic data showing official activity was more robust than expected. But the recent FOMC meeting and latest monthly jobs report pointed to signs of cooling, with benign wage growth.
Energy prices could support headline inflation, while heavily weighted shelter inflation should continue to shape the overall pace and direction of CPI. But going forward, slowing demand is likely to present further evidence of a gradual softening in prices across the economy. Some economists have highlighted that the annual figures might benefit from favourable base effects. However, this won’t be seen again until August, so further progress on falling prices may prove tricky in the next few months.
A slower pace of price rises in the US CPI release on Wednesday could reignite the positive vibes about disinflation, and potentially push stocks to record highs, after three straight weeks of gains. The recent upside break in gold might also be boosted by a softer than expected report, if the dollar dips back below 105. The PPI data will also likely be closely watched given that some of the components feed into the core PCE data, which is the Fed’s favoured measure of inflation.
The UK labour market is likely to show further signs of a slowdown with crucial wage growth data forecast to moderate. Those figures will be very closely watched by the Bank of England, alongside next week’s CPI figures, in terms of whether we see a June rate cut. The odds of that happening were recently just below a coin flip after last week’s central bank meeting. Policymakers inched a step nearer to a summer rate reduction. We get one more labour market report after the Tuesday release, and two inflation reports before the Old Lady meets next month. Cable continues to struggle to break higher above its 200-day simple moving average at 1.2543.
