The latest inflation figures will be the crucial event for traders this week as markets debate whether the US Federal Reserve will cut interest rates by 25 or 50 basis points.
July’s figures put US inflation below three per cent for the first time since March 2021 and economists expect to see further progress in August.
The headline rate is expected to dip to 2.6 per cent although core inflation, which strips out more volatile components like food and energy, will remain at 3.2 per cent.
The figures come out a crucial time with the Fed preparing to cut interest rates for the first time since the pandemic.
Figures out in early August had shown a rapid increase in unemployment as well as a sharper than expected slowdown in jobs growth, raising concerns that the Fed had waited too long to cut interest rates.
Speaking at the end of August, Jerome Powell said that the “time has come” to cut rates, but he not give any guidance about the potential size of the interest rate cut.
Since then traders have been debating whether the Fed will cut rates by 25 basis points or opt for a larger 50 basis point cut.
The most recent jobs figures, out at the end of last week, did not tilt the balance decisively in either direction.
The unemployment rate edged lower while jobs growth recovered slightly from July’s horror show, albeit still slightly slower than expected. Preston Caldwell, a senior US economist at Morningstar, said the data gave the Fed “reason to cut, but not reason to panic”.
According to CME’s Fedwatch, there is a roughly 30 per cent chance that the Fed will opt for a 50 basis point cut at its upcoming meeting.
The other major event of the week will be the European Central Bank’s (ECB) latest interest rate decision.
Having left rates on hold last time around, the ECB is widely expected to cut rates by 25 basis points as inflationary pressures have continued easing.
“Fading inflationary pressures are the strongest argument in favour of another rate cut,” Carsten Brzeski, ING’s global head of macro said.
“At the same time, still high wage growth and still too high, albeit declining, selling price expectations suggest that the fight against inflation is not entirely over, yet,” Brzeski added.