As the November elections loom larger, each piece of economic data is becoming more important.
This week’s US inflation data will test the markets’ confidence that US inflation is still tracking towards the point where the Federal Reserve Board can start cutting US interest rates later this year.and sent share prices tumbling and bond yields spiking when both the headline and “core” numbers came in above expectations.
Either way, inflation would remain well above the Fed’s target of 2 per cent, albeit that the core numbers would be on a gradually declining trend. Analysing the state of the US economy, and therefore the likely course of US rates which have significant implications for global financial markets, isn’t straightforward because the economy has so far not responded as might have been expected to the Fed’s 11 rate rises – from effectively zero to a range of 5.25 to 5.5 per cent, the highest rate in 20 years --since March 2022.
Consumer and business demand has held up, share and house prices have climbed and the economy has kept humming along with unemployment numbers remaining close to historic lows. Sharp increases in unemployment are usually the barometer of central bankers’ “success” in taming inflation. That’s not likely to be a factor in the Fed’s decision-making, although the bank will be conscious that its decisions will have political implications and that any rate cut ahead of the election in early November is inevitably going to attract a ferocious attack from Donald Trump and threats of retribution if he were to prevail in the presidential election.