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The upcoming figures are likely to reveal a rise in US inflation in May as the impact of President Donald Trump’s tariffs begins to show in the data.
Economists surveyed by Reuters are predicting a 2.5 per cent annual increase in consumer prices when the data is released on Wednesday, up from 2.3 per cent the previous month. Core inflation, which excludes volatile food and energy prices, is also expected to accelerate to 2.9 per cent last month, up from 2.8 per cent in April.
The inflation report is anticipated to reflect the effects of Trump’s tariffs, with economists expecting them to contribute to price pressures.
“Tariffs are expected to have a broader impact on the data than last month, where the most obvious sign of tariff-related price hikes was the 8.8 per cent increase in audio equipment prices,” analysts at Bank of America noted. They also mentioned that a decline in vehicle prices due to seasonal factors may prevent a larger overall increase in goods inflation.
An increase in inflation is likely to deter the Federal Reserve from reducing interest rates in the near future. Fed governor Adriana Kugler recently expressed support for maintaining current rates, citing elevated inflation risks from tariffs that could continue to push prices higher through 2025. Philadelphia Fed president Patrick Harker also indicated that the Fed is likely to keep rates steady at the upcoming meeting.
Following positive employment data, traders in the futures market have scaled back expectations for rate cuts this year. Currently, there is a small chance that the Fed will lower borrowing costs once by the end of the year, although the central expectation remains for two cuts. Katie Duguid
Are UK wage pressures easing?
UK labor market data on Tuesday will provide insight into wage pressures, a key factor for upcoming Bank of England interest rate decisions, following recent changes in national insurance contributions and the national living wage.
Economists surveyed by Reuters expect annual wage growth excluding bonuses to slow to 5.4 per cent in the three months to April, down from 5.6 per cent in the previous period. Philip Shaw from Investec predicts an even sharper decline to 5.3 per cent.
“Higher NICs likely put downward pressure on wage growth as employers made efforts to contain costs,” Shaw explained. He also expects the unemployment rate to rise to 4.6 per cent, in line with consensus.
The BoE’s Decision Maker Panel survey also pointed to softer wage growth in the three months to May. Meanwhile, GDP is expected to have contracted by 0.1 per cent in April, following unexpected growth in March.
If the data indicates a weakening economy and slowing wage growth, it may strengthen the case for further rate cuts. However, signs of resilience in output and employment could lead policymakers to take a more cautious approach. Current market expectations are for one or two rate cuts by the end of the year. Valentina Romei
Can the strong performance of emerging markets currencies continue?
Emerging market currencies have benefited from this year’s dollar weakness, with eastern European currencies and Brazil’s real among the top performers.
“EM central banks have kept policy rates above inflation, and EMs are less reliant on US dollar flows for financing,” noted Grant Webster from Ninety One. Not all emerging currencies are equally attractive, with some analysts remaining cautious on certain currencies.
Deutsche Bank analysts, for example, remain bearish on the Hungarian forint due to various factors. Alan Livsey