By Jack Farchy
Published: Last updated: June 13 2010 20:22
Inflation is likely to be in focus this week, with data from the US and Europe expected to show a trend towards slowing prices in western economies.
That would highlight a divergence from emerging economies, which are experiencing growing inflationary pressures.In the US, annual consumer price inflation is expected to fall to 2 per cent in May from 2.2 per cent a month earlier, with prices dropping 0.2 per cent month on month. Meanwhile, core CPI (which excludes volatile food and fuel costs) is expected to remain at 0.9 per cent, its lowest reading since the 1960s.
James Knightley, senior economist at ING, said he expected the disinflationary trend to persist: “With the labour market remaining weak and spare capacity in the economy not being eroded at any great pace, we see the risk of it falling further – if not this week, then certainly in the next couple of months.”
Mr Knightley added: “This should allow Fed chairman [Ben] Bernanke to dismiss calls for imminent rate hikes from some of the Fed’s more hawkish members.”
A similar theme is expected to emerge from other western economies. Inflation is expected to ease in the UK, which has witnessed surging prices because of sterling’s weakness and an increase in value added tax. The Bank of England on June 10 kept rates on hold at 0.5 per cent, having argued that the high inflation rate was caused by temporary factors that should soon fade.
Economists forecast annual CPI to ease from 3.7 per cent in April to 3.5 per cent in May as petrol prices level off and the effect of the VAT rise begins to fade. That remains, however, well above the Bank’s target of 2 per cent.
A final reading for eurozone CPI is expected to confirm the earlier estimate of 1.6 per cent.
The trend for slowing inflation in western economies is in stark contrast to emerging markets, where rising food prices and strong economic growth are driving inflation higher.
Last week, China reported annual CPI at 3.1 per cent for May, with food inflation running at 6.1 per cent. The UN’s Food and Agriculture Organisation expects the global cost of food imports to hit $921bn this year, up 11.5 per cent from 2009.
Meanwhile, manufacturing figures in the west are forecast to show strength. Analysts expect a 0.9 per cent month-on-month gain in US industrial production. In Europe, Germany’s Zew survey of economic sentiment is expected to rise to 48 from 45.8, while eurozone industrial production is forecast to register a 0.6 per cent month-on-month rise.
Thursday’s Swiss National Bank meeting is likely to be the week’s most interesting central bank action. Rates are expected to be kept on hold, but the market will be watching for any indication that the SNB might intervene to prevent further appreciation of its currency against the euro.
Copyright The Financial Times Limited 2010.
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