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The Federal Reserve’s favoured inflation metric is expected to show a slight tick uptick in price pressures in May, with an acceleration in both core and headline measures, as the effects of Donald Trump’s tariffs begin to appear in US prices.
On Friday, the Bureau of Economic Analysis will release the personal consumption expenditures index data for May, which economists surveyed by Bloomberg forecast will show a headline figure of 2.3 per cent year over year, up from 2.1 per cent the month prior. The core measure, which strips out the volatile food and energy sectors and is most closely watched by the Fed, is expected to be 2.6 per cent, a step up from the 2.5 per cent rate in April.
The PCE data will follow a modest jump in consumer price pressures recorded earlier this month, which showed CPI at 2.4 per cent in May, below economists’ expectations of 2.5 per cent, but above the rate of 2.3 per cent recorded in April.
An bigger acceleration in price pressures could deter the Federal Reserve from cutting interest rates any time soon. Traders in the futures market currently expect the Fed to lower borrowing costs twice this year, beginning in October.
Even a muted inflation number is unlikely to signal to the central bank that the coast is clear for rate cuts, according to analysts at ING.
“This is very much the calm before the storm, with tariff-induced price hikes expected to become visible from July,” they said. Kate Duguid
How is the Eurozone economy handling trade uncertainty?
Investors will be looking at business data next week for clues about the health of the Eurozone economy as trade uncertainty rumbles on for the bloc.
The HCOB Eurozone purchasing managers’ index, a monthly poll of supply chain managers, is expected to show a higher reading for both services and manufacturing in June, as the immediate uncertainty following Trump’s April tariff announcement has waned. However, the improvement is not expected to be sufficient to return either sector to growth.
“The direction of travel is definitely up,” said Tomasz Wieladek, chief European economist at T Rowe Price. “There’s been a break in bad trade news, so people are expecting things to get a bit better.”
A poll of economists by Reuters suggests that the manufacturing reading is likely to rise from 49.4 in May to 49.7, while the services figure is expected to rise from 49.7 to reach 50. A reading above 50 indicates expansion.
Wieladek said he would be watching the services number particularly closely, partly because “manufacturing [data] is polluted by frontloading dynamics” as businesses make pre-emptive purchases before US tariffs come into effect.
The European Central Bank cut interest rates to 2 per cent earlier this month, but took a more hawkish tone than expected about future rate cuts. Weaker than expected PMI data would bolster the case for faster rate reductions.
Wieladek added that economic sentiment could deteriorate later in the year.
“Trade is still a big uncertainty,” he said. “We just don’t know how this is going to end.” Emily Herbert
Is activity still growing in the UK?
UK PMIs are also on investors’ agenda, with surveys for June on Monday offering an indication of how the economy is holding up after a strong start to the year.
Policymakers have turned to surveys such as the PMIs to estimate the pace of “underlying” growth, arguing that headline figures can be distorted by one-off effects. In the first quarter, GDP rose 0.7 per cent, driven in part by temporary factors such as stockpiling ahead of US tariff changes. Underlying growth, the Bank of England said, was closer to zero — and it is expected to remain subdued in the second quarter.
Economists polled by Bloomberg expect the flash composite PMI, which tracks activity in the manufacturing and services sectors, to edge up to 50.5 in June from 50.3 in May. A reading above 50 signals expansion.
Receding fears over US tariffs probably buoyed confidence in June, as they did in May. But renewed instability in the Middle East is adding fresh concerns for businesses, particularly over supply chain disruptions, rising oil prices and their knock-on effects on consumer demand and operating costs.
Manufacturing is expected to stay in contraction, dragged down by trade uncertainty and continued job losses. This is likely to partially offset modest growth in services. The survey will also offer an update on inflationary pressures, with firms facing higher wage and national insurance costs since April — and revealing how far these are being passed on to consumers. Valentina Romei
