'Sticky' inflation data will keep the Federal Reserve on track for 50bp rate hikes in June and July, while in Europe, the only real question is why the European Central Bank isn't hiking at its meeting this Thursday
US inflation set to keep Fed on track for 50bp hikes in June and July
US inflation will be a key indicator to watch. With gasoline prices hitting new highs and food prices under upward pressure we expect the annual rate to remain above 8%. Core inflation may slow marginally, but remain close to 6% given decent corporate pricing power allowing businesses to pass cost increases onto customers. Inflation is unlikely to fall quickly in the near term unless the geopolitical backdrop improves and energy prices fall back, supply chains show improvement, and labour supply rises to mitigate against rising wage pressure. Unfortunately, none of this seems set to happen in the near term and that will keep the Fed in policy tightening mode with 50bp rate hikes at the June and July FOMC meetings.
Why isn't the ECB hiking rates this week?
With headline and core inflation still on the rise, and 2024 inflation very close to the ECB’s definition of price stability, the only real question for Thursday's meeting is why not hike rates now?
In fact, since the start of the year, ECB meetings and press conferences have always surprised on the hawkish side. At the current juncture, and given recent comments, the only way for this to happen again would be to actually hike rates this week. And in all honesty, the case for such a move is very clear. The only argument against not hiking is the ECB’s own ‘sequencing’, ie first, stop net asset purchases before hiking rates. A rate hike this week would undermine the ECB’s credibility and forward guidance.
Following the logic of the ECB, a hawkish surprise this week would weaken the de facto pre-commitment by Chief Economist Philip Lane and President Christine Lagarde, and keep a 50bp rate hike on the table for July. Read our full preview here.
Key events next week
Source: Key events in developed markets this week | Article | ING Think
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