How fast is UK inflation falling?

UK inflation is expected to tumble to within touching distance of the Bank of England’s 2 per cent target when consumer price data for April is published this week, thanks to a sharp drop in household energy bills.

But investors are likely to focus particularly on the services component of inflation, which is closely monitored by the BoE as a gauge of domestic price pressures.

Economists polled by Reuters expect a 2.1 per cent annual rise in headline consumer prices in the figures published on Wednesday, down from 3.2 per cent in the previous month and far below the 42-year high of 11.1 per cent reached in October 2022.

April’s forecast large drop is largely the result of a 12 per cent fall in the household energy bills cap set by the energy regulator Ofgem following a decline in wholesale gas prices.

Economists expect overall inflation to remain at about 2 per cent in the third quarter and rise to 2.3 per cent in the final three months of the year.

Services inflation, which is more sensitive to labour costs, is taking longer to recede. Price rises in the sector were stuck at the elevated rate of 6 per cent in March, making some policymakers cautious about cutting interest rates.

Sanjay Raja, an economist at Deutsche Bank, expects services price growth to ease to 5.4 per cent, a touch lower than the 5.5 per cent forecast by the Bank of England. However, he warned that “risks are skewed to the upside, particularly for catering and airfares estimates, with the former more sensitive to the national living wage hike”.

Any sign that price pressures are proving more persistent could upend investor bets on a BoE interest rate cut next month, currently seen as a more than 50 per cent probability by markets. Valentina Romei

Will wage data derail the ECB’s plans?

One of the vital factors determining how much the European Central Bank will cut interest rates this year is whether wage growth keeps slowing, meaning this Thursday’s first-quarter data on Eurozone negotiated wages will carry extra importance.

The ECB has clearly signalled that it is likely to start cutting its benchmark deposit rate from an all-time high of 4 per cent at its next policy meeting on June 6, unless there is a nasty surprise from inflation or wage data before then.

Most economists expect negotiated wages in the single currency bloc to continue slowing in the first three months of the year, after they rose at an annual rate of 4.5 per cent in the fourth quarter, down from 4.7 per cent in the previous quarter.

Loredana Maria Federico, an economist at Italian bank UniCredit, estimated on the basis of already published national wage data that Eurozone negotiated wage growth would slow to 4.2 per cent in the first quarter.

“While a rate cut at the next meeting appears to be a done deal, an outcome broadly in line with our forecast would leave the ECB on track for further, gradual, easing beyond June,” she said, predicting a total of three 0.25 percentage point rate cuts this year.

But if wage growth remains higher than expected it could cause the ECB to take a more cautious approach than investors expect — especially as the Federal Reserve has signalled it will keep rates higher for longer in the face of sticky US inflation.

If wage data — along with profit and productivity figures — no longer show price pressures are easing, ECB executive Isabel Schnabel warned last week that “we would need to be more careful, because it could mean that the return to our target is delayed or that inflation even picks up again”. Martin Arnold

What will Fed minutes reveal about the path of US interest rates?

On Wednesday, the Federal Reserve will release the minutes from its May meeting, which will offer investors insight into the most recent deliberations among officials about how soon to cut interest rates.

The Fed at its last meeting chose to keep benchmark borrowing costs at their current 23-year high — a range of 5.25 per cent to 5.5 per cent — and said that further progress on inflation was necessary in order for the committee to consider cutting them. The meeting came on the heels of three months of hot inflation data, and chair Jay Powell implied that interest rate cuts would be stalled until the second half of the year.

The conversation about the path forward, and any indication of dissent among officials about where interest rates go from here, will be watched closely by investors.

Since the meeting, the US has released consumer price figures for April, which showed that inflation cooled last month, though remained well above the Fed’s 2 per cent target. Some analysts caution that because the meeting happened prior to that data, the minutes may be somewhat out of sync with the latest snapshot of the US economy.

“The minutes will be skewed hawkishly given that when the committee last met . . . the prevailing inflation figures showed nothing but stubbornly sticky consumer price pressures in the first quarter. While Powell took rate hikes off the table, the broader conversation at the meeting was surely centred on the fact that progress on inflation had stalled,” wrote Ian Lyngen, head of US interest rates at BMO Capital Markets. Kate Duguid