Will US consumer prices continue rising at a rapid clip?

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US inflation is expected to have remained hot in June, adding to signs that labour shortages, higher commodity prices and the ending of social curbs are contributing to higher inflation.

Consumer prices in June, which will be released by the Bureau of Labor Statistics on Tuesday, are expected to have risen 4.9 per cent from the same month a year ago, according to a poll of economists by Bloomberg.

Inflation came in higher than expected in May, with consumer prices up 5 per cent in the biggest annual rise in nearly 13 years. The leap fuelled investor speculation that the Federal Reserve would be forced to lift interest rates ahead of its current schedule.

Business executives have continued reporting brisk price increases, according to a closely watched set of surveys by the Institute for Supply Management. Prices paid by manufacturing firms are rising faster than at any point since 1979, with those paid by services companies rising at levels last seen in 2008, the data show.

Workers’ bargaining power, as the need to hire staff rapidly in the service sector gives job seekers the upper hand, “is going to be an important tell on the inflation debate”, said Ryan Detrick, chief market strategist at LPL Financial.

If wage growth accelerates it will “add to inflation pressures that will likely lead to an earlier Federal Reserve policy response”, added James Knightley, chief international economist at ING. Matthew Rocco

Are investors underestimating UK inflation?

UK investors’ firmly held belief that this summer’s burst of inflation will be transitory is likely to be tested again this week with the release of June’s inflation data.

Wednesday’s consumer price index will provide the latest glimpse into the knock-on effects on prices of the UK’s rapid economic rebound as coronavirus lockdowns are lifted, and of how accurately the market has been forecasting those price rises.

Signs have already emerged that investors might have underestimated inflation. May’s reading of a 2.1 per cent annual rise was above economists’ forecasts of 1.8 per cent. Economists have forecast an annual rise of 2.2 per cent for June, according to a Reuters poll.

However, after mounting inflation concerns initially pushed the 10-year gilt yield up from less than 0.2 per cent at the end of last year to about 0.9 per cent in May, investors have been prepared recently to look through the data.

“There’s only so much stuff we can all buy” as economies reopen, said Ahmer Tirmizi, senior investment strategist at Seven Investment Management. “In other words, we believe the pop in inflation will be transitory.”

The Bank of England said at its most recent policy meeting last month that while inflation was “likely to exceed 3 per cent” it would later fall back and should not affect monetary policy.

For now, investors appear ready to take the cental bank at its word.

“Governor [Andrew] Bailey has emphasised that they will only respond if inflation turns out to be more persistent than they expected. It is obviously far too early to assess that now,” said Sushil Wadhwani, chief investment officer of QMA Wadhwani and a former member of the bank’s Monetary Policy Committee. Laurence Fletcher

Is China’s economic recovery losing momentum?

Investors and traders will be closely watching China’s GDP data on Thursday for any signs that the country’s growth rate is slowing following a strong recovery from the economic effects of the pandemic.

Economists polled by Bloomberg expect China’s economy to have grown by 8 per cent in the second quarter year on year, after growth of just 3.2 per cent in the same quarter last year.

In the first quarter of 2021, China’s economy expanded by 18.3 per cent year on year, but the unusually high rise was driven by a low base at the start of 2020 due to the pandemic. In quarter-on-quarter terms, gross domestic product rose just 0.6 per cent, far below expectations.

Since a historic contraction in its economy at the start of last year, China has embarked on an industry-fuelled recovery. By the end of 2020, its pace of growth had exceeded pre-pandemic levels — far surpassing other major economies, which continue to grapple with high infection rates.

Economists have anticipated a switch to greater consumption as the Chinese recovery continues. Data, also released on Thursday, are expected to show retail sales growth of 12 per cent year on year.

Larry Hu, chief China economist at Macquarie, said China’s growth model in the first half of the year was “very different from that in the past decade, as it’s driven more by exports than investment”. 

He added that exports may have already peaked and that growth could continue to slow in the second half on tightening credit conditions. Separate official data, to be released on Tuesday, will reveal export growth in June compared with a year earlier, with economists forecasting a 22 per cent rise. Thomas Hale

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