Inflation back in focus ahead of key US and eurozone releases

The continuing battle against inflation will be the main focus for markets this week as new data will shed light on the state of price rises in both the US and the eurozone.

On Friday, July’s personal consumption expenditure (PCE) index, the Fed’s preferred gauge of inflation, will be published in the US.

PCE inflation differs from the traditional measure of inflation, such as the consumer price index (CPI) because it includes a wider scope of data. CPI uses data from household surveys, while PCE uses data from suppliers, non-profits and the country’s GDP data.

Analysts expect the PCE index to tick up to 2.6 per cent from 2.5 per cent, but this would still be soft enough for the Fed to cut rates in September, analysts suggested.

“The PCE inflation report may only move the dial if we see a print closer to three per cent [year on year],” Chris Weston, head of research at Pepperstone, said.

With inflation approaching the two per cent target and cracks growing in the labour market, traders are now certain that the Fed will cut interest rates in September.

Speaking last week, Powell said the “time has come” for the Fed to start easing policy.

The only question is whether the Fed cuts rates by 25 basis points or opts for a larger 50 basis point cut.

Markets put the odds of a 50 basis point cut at around 33 per cent, but a softer than expected inflation reading on Friday might tilt the balance in favour of more aggressive easing.

The latest ‘flash’ inflation estimate from the eurozone will also be published on Friday, with economists expecting the headline rate to fall to 2.2 per cent from 2.6 per cent previously. This would bring the headline rate down to its lowest level since July 2021.

Core inflation, which strips out more volatile components like food and energy, is expected to be more sticky, however. Most economists expect core inflation to fall to 2.8 per cent from 2.9 per cent in July.