The latest Reuters poll reveals that economists are predicting a decrease in headline year-over-year inflation to +2.6%, which is 0.3 percentage points lower than July’s figure of +2.9%. The estimated range falls between +2.6% and +2.4%. On the other hand, core inflation, excluding energy and food components, is expected to remain steady at +3.2% compared to the previous month. This data comes after a gradual softening trend observed over the past four months.
There is ongoing speculation about whether the Federal Reserve will opt for a 25 or 50 basis point cut. Despite the recent softening in inflation numbers and a decline in job growth for August, there is no clear indication of an imminent recession. With unemployment at 4.2% and real GDP growing at an annualized rate of +3.0% in Q2 24, the Fed is unlikely to implement a bulkier 50 basis point reduction.
On the other side of the Atlantic, the European Central Bank is expected to lower all three benchmark rates at the upcoming meeting. With headline inflation hovering around the central bank’s 2.0% target, the market anticipates a 25 basis point reduction this week, possibly followed by another cut in December. The overall expectation is that by the end of the year, there will be a total reduction of 63 basis points.
In the Euro area, CPI inflation slightly decreased to +2.2% year-over-year in August from +2.6% in July, marking the lowest level since mid-2021. However, core inflation, excluding certain components, has averaged +2.9% since the beginning of the year. The presence of sticky services inflation and elevated wage growth is likely to prevent the ECB from raising rates more than twice this year.
As the central bank prepares to announce its rate decision and provide economic forecasts, analysts expect some downward revisions, particularly in headline inflation, wages, and GDP growth. This could potentially impact the value of the euro. However, there may be an upward revision to core inflation. Market participants will also closely monitor the forward guidance on future rate reductions, although expectations for substantial commentary are low.
Central banks are facing the challenge of balancing inflationary pressures with economic growth. The decisions made in the coming months will have significant implications for monetary policy and market stability.