The Reuters poll suggests that inflation trends are expected to ease in the coming months, with headline YoY inflation anticipated to decrease to +2.6% from +2.9% in July. Similarly, core inflation is predicted to remain at +3.2%, indicating stability in the inflation rate excluding energy and food components. The consecutive months of softening data raise concerns about the overall economic outlook, especially in the context of ongoing debates about possible interest rate cuts by the Federal Reserve.
The ongoing debate about whether the Fed will opt for a 25 or 50 basis point cut reflects the uncertainty surrounding the current economic situation. Despite softer inflation numbers and a slowdown in job growth in August, the absence of clear indicators of a recession, such as a significant increase in unemployment rates or a decline in real GDP growth, suggests that a more substantial 50 basis point reduction may not be imminent.
On the other hand, the European Central Bank is widely expected to reduce all three benchmark rates at its upcoming meeting, following a 25 basis point rate reduction in June. The proximity of headline inflation to the central bank’s 2.0% target indicates that a 25 basis point reduction is likely this week, with the possibility of another cut in December. This aligns with market expectations of a total reduction of 63 basis points by the end of the year.
While headline inflation in the Euro area cooled to +2.2% in August, down from +2.6% in July, core inflation remains a concern. Despite a slight decrease in core inflation in August, the average rate since the beginning of the year has been +2.9%. This, coupled with sticky services inflation and elevated wage growth, may deter the ECB from raising rates more than twice this year.
The central banks’ decisions on interest rates and economic forecasts will play a crucial role in shaping future inflation trends and overall economic performance. Any downward revisions in headline inflation, wages, and growth forecasts are expected to have an impact on the single currency (EUR), potentially weighing it down. Nonetheless, with the possibility of an upward revision to core inflation and cautious forward guidance on rate reductions, analysts are closely monitoring the central banks’ statements for insights into future monetary policy decisions.