How hot is eurozone inflation?

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How hot is eurozone inflation?

Eurozone inflation is likely to keep falling when the data for June is published on Friday but rate-setters at the European Central Bank will be watching to see if price growth is still rising after energy and food prices are excluded.

Consumer prices in the single currency bloc are expected to be up 5.7 per cent in the year to June, compared with 6.1 per cent a month earlier, according to a Reuters poll of economists. 

However, the ECB is intently focused on underlying price pressures, which could remain sticky even as energy prices drop from last year’s surge. Services prices are likely to be boosted by the comparison with last year, when Germany launched heavily subsidised public transport tickets.

Andrew Kenningham, an economist at research group Capital Economics, said he expected the difference in German transport prices to boost the eurozone’s core inflation — stripping out energy and food prices — to 5.5 per cent in June, up from 5.3 per cent in May.

There were signs of cooling price pressures from S&P Global’s survey of purchasing managers last week, showing companies’ selling prices rose at the slowest rate for 27 months. But higher wages kept pushing up their input costs.

“The bottom line is that, looking through the volatility, it is not yet clear that services inflation is falling; indeed, it might surprise on the upside next week,” said Kenningham. “So the ECB will stay hawkish in its rhetoric.”
Martin Arnold

Will the Fed’s preferred inflation measure show prices cooling?

Investors will also be watching the core personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation, for the latest indication of inflationary pressures in the US.

The data is expected to show that the price gauge — which strips out the volatile food and energy sectors — rose 4.7 per cent year on year in May, the same level as April, according to economists polled by Reuters. Core PCE has stagnated between 4.6 and 4.7 per cent since the beginning of the year, and has been of significant concern to the Fed. 

The stubbornly high core PCE figure is part of the reason why the Fed has suggested it will have to increase interest rates twice more this year even after pausing its rate-raising cycle in June. In its summary of economic projections this month — the so-called dot plot — the Fed projected that core PCE would end the year at 3.9 per cent, up significantly from its forecast of 3.6 per cent in March. 

Some analysts think the Fed is being overly pessimistic. Gabriele Cozzi and Matt Raskin of Deutsche Bank this week published research suggesting core PCE could end the year around 3.5 per cent as the economy slows.
Kate Duguid

How weak is the UK housing market?

Soaring interest rates are rattling the UK property market, data on house prices and mortgage approvals out next week is set to show.

Mortgage rates have soared in the past month to levels not seen since the 2008 financial crisis after official figures revealed higher than expected wage growth and inflation. 

The price pressures pushed the Bank of England to raise rates more than forecast, by half a percentage point to 5 per cent, the highest level since 2008. Markets now expect the central bank to increase rates to 6 per cent by the end of the year.

Figures on mortgage approvals for May, to be published by the BoE on Wednesday, will not fully capture the sharp increase in rates at the end of that month, but they are likely to show ongoing weakness in the market.

Ellie Henderson, economist at Investec, has forecast that the figure will be 50,000, up from 48,700 in April, but 25 per cent below the level in May 2022. “It will be the numbers for June and beyond that will reveal the impact of now much higher mortgage rates on housing market momentum,” she said.

She also forecast that the Nationwide house price index, due to be released at the end of the week, will show a 3.9 per cent annual decline in June, the steepest since 2009.

“The market is clearly turning,” said Myron Jobson, senior personal finance analyst at Interactive Investor. “House prices remain squarely on the downwards trajectory as the impact from the affordability squeeze from high mortgage rates and high inflation continues to filter through.” 
Valentina Romei