Economic outlook: Inflation data in focus

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The eurozone’s sovereign debt situation is likely to remain in focus this week and, after Spain reported on Friday that annual inflation fell for the first time in more than two decades, the region will be looking closely at Tuesday’s consumer price data.

Although the European Central Bank is keen to keep inflation under control, Spain’s weaker-than-expected price growth last month raised fears of deflation.

Some economists, however, think recent sovereign debt purchases by the ECB of government bonds from countries on the eurozone periphery amount to quantitative easing.

This could aggravate inflationary pressures, but the extreme austerity measures, as announced already by Greece, Portugal and Spain, are likely to damp growth for several years and keep prices in check.

April eurozone consumer price inflation is expected to rise to an annual rate of 1.5 per cent after coming in at 1.4 per cent in March.

Inflation data are also expected from the UK, whose loose monetary policy has helped send the consumer price index to an annualised rate of 3.4 per cent. Already well above the Bank of England’s target rate of 2 per cent, CPI – published Tuesday – is likely to have risen to 3.5 per cent, a result of higher utility bills, fuel costs and VAT moving back up to 17.5 per cent in January.

On Wednesday, minutes from the Bank’s last monetary policy committee meeting earlier this month are expected to show that all nine MPC members voted to keep interest rates unchanged at 0.5 per cent and not to add to the £200bn spent on its QE programme.

US consumer prices are expected to be much more benign, helped by lower fuel prices after a supply glut helped bring down crude oil prices.

“We expect inflation to remain subdued and monthly inflation accrual to wane,” said Keith Blackwell at RBC Capital Markets.

Analysts surveyed by Reuters expect core CPI in April to have dropped to an annual rate of 1 per cent, from 1.1 per cent in March.

The week is an important one for expectations indicators, with consumer confidence surveys from Japan and Europe and business and investor confidence surveys from Germany.

ZEW economic sentiment for May is expected to reflect German investors’ uncertainty following the eurozone debt crisis and is forecast to slip to a reading of 46, from 53 last month.

IFO business confidence, on the other hand, reflects the improvement seen in German business activity surveys of recent months and is forecast to have edged up to 101.8 from 101.6 in April.

Business activity surveys from New York and Philadelphia – the Empire State and Philly Fed reports – are both expected to show manufacturing growth in two of the most industrialised regions of the US.

The keynote release from Japan this week will be Thursday’s first-quarter gross domestic product data. Forecasts range from 5.1 per cent to 5.5 per cent annualised growth.

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