Recent estimates from a Reuters poll suggest that economists are expecting a drop in headline year-over-year (YoY) inflation to +2.6%, down 0.3 percentage points from the previous month. The estimate range falls between +2.6% and +2.4%. On the other hand, core inflation, which excludes energy and food components, is anticipated to remain stable at +3.2% YoY. This forecast aligns with July’s figures and falls within the range of +3.2% and +3.1%. The trend of softer data has persisted over the past four months.
For the month-over-month (MoM) inflation rates, both headline and core inflation are expected to increase by +0.2%, mirroring the numbers from July. The ongoing debate within the Federal Reserve revolves around whether there will be a 25 or 50 basis point cut in response to these figures. Despite the softer inflation data, which may have a negative impact on the USD, and the decrease in job growth observed in August, the current economic situation does not signal an imminent recession. With unemployment at 4.2% and real GDP growing at a rate of +3.0% annually in the second quarter of 2024, a significant 50 basis point reduction by the Fed seems unlikely.
On the other side of the Atlantic, the European Central Bank (ECB) is expected to take action in response to the inflation data. Euro area Consumer Price Index (CPI) inflation dropped to +2.2% YoY in August from +2.6% in July, marking the lowest level since mid-2021. However, core inflation, which excludes energy, food, alcohol, and tobacco, paints a different picture. Despite the decline in YoY core inflation to +2.8% in August from +2.9% in July, the average remains at +2.9% since the beginning of the year. This, coupled with consistent services inflation at around +4.0% and elevated wage growth, will likely prevent the ECB from raising rates more than twice this year.
Following a 25 basis point rate reduction in June, markets anticipate a similar cut from the ECB this week in response to the inflation figures. There is also speculation about another 25 basis point cut at the December meeting. The overall expectation is a total of 63 basis points reduction by the end of the year. As the ECB prepares to announce its decision, along with updated economic forecasts, analysts predict downward revisions in headline inflation, wages, and GDP growth. This may exert pressure on the Euro (EUR), although a possible upward revision in core inflation could offset some of the negative effects.
The central banks face a challenging environment with fluctuating inflation levels and economic indicators. Market participants will closely monitor the announcements and forward guidance from both the Federal Reserve and the European Central Bank to gauge the potential impact on monetary policy moving forward. Analysts are cautious about excessive optimism in light of the economic uncertainties and the need for careful consideration before making significant policy changes.
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