The Fed's preferred price indicator is likely to reinforce interest rate cuts

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(Bloomberg) — Next week's U.S. inflation figures will reinforce that long-awaited interest rate cuts are imminent, while consumer spending figures suggest the central bank has managed to maintain the expansion.

Economists expect the personal consumption expenditures price index (excluding food and energy) – the Fed's preferred measure of underlying inflation – to rise 0.2 percent in July for the second straight month, bringing the three-month annualized core inflation rate down to 2.1 percent, slightly above the central bank's 2 percent target.

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In the report published on Friday, economists from the Bloomberg survey also expect that non-price-adjusted consumer spending will rise by 0.5 percent – that would be the strongest increase in four months.

In his speech at the Jackson Hole symposium, Fed Chairman Jerome Powell acknowledged recent progress on inflation and said he was confident that inflation was on track back toward 2% and that “the time has come for a policy adjustment.”

Friday's comment marked a major turning point in the Fed's two-year-long battle against price pressures and underscored how the focus has shifted to labor market risks – the other part of the central bank's dual mandate. Job growth has helped keep consumers spending – a key to ensuring economic growth.

On Thursday, the government will publish its first revision of gross domestic product for the second quarter. The median forecast among economists is for an annualized growth rate of 2.8%, unchanged from the last reading.

Other US data next week includes durable goods orders for July on Monday and separate consumer confidence indices on Tuesday and Friday.

Mary Daly, president of the San Francisco Fed and a 2024 voting FOMC member, will appear on Bloomberg Television on Monday. Another voting Fed president, Atlanta Fed President Rafael Bostic, will speak on the economic outlook on Wednesday.

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What Bloomberg Economics says:

“Powell's very dovish speech in Jackson Hole was music to the ears of market participants. He promised that the Fed would do 'everything' it could to support a strong labor market and provide a foundation for the economy. We think a little reality check is in order.”

— Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou. For the full analysis, click here.

Further north, Canada's second-quarter GDP data will be the last major economic release before the central bank is expected to cut interest rates for the third consecutive time on September 4.

Preliminary data pointed to annualized quarterly growth of 2.2 percent, higher than the central bank's forecast of 1.5 percent, underscoring the central bank's efforts to ensure a soft landing while continuing to reduce borrowing costs.

In addition, investors will be following the latest developments regarding the resolution of a rail dispute in Canada that has caused turmoil in North American supply chains.

The eurozone will release inflation figures for August less than two weeks before the European Central Bank's next monetary policy decision, while the Chinese central bank will set the interest rate on its one-year policy bonds. Hungary and Israel will also make interest rate decisions.

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Click here to see what happened last week. Below is our overview of what's coming up in the global economy.

Asia

The week begins with renewed focus on China's new monetary policy framework as the People's Bank of China sets the interest rate on its one-year policy bonds. After a surprise cut in July, the authorities are expected to keep the rate at 2.3%.

Monday's decision came after the PBoC signaled this month that it would downplay the role of the medium-term lending facility as a policy tool and give greater importance to the seven-day reverse repurchase rate.

A day later, China will receive industrial profit figures that could fuel calls for further policy measures to stimulate the economy, and on Saturday the official PMI figures will be released in Beijing.

Elsewhere, prices will be an issue.

The lowered inflation indicator in Australia for July will provide the Australian Reserve Bank with new clues on whether or not to maintain its aggressive rhetoric.

Japan will also receive an update on consumer inflation for the capital, a leading indicator of national trends. Data on Friday could show India's economic growth eased slightly in the second quarter from a year earlier, and trade figures from Thailand, Sri Lanka and Hong Kong are due later in the week. Kazakhstan's central bank meets on Thursday to decide whether to cut its key interest rate for the third consecutive month.

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• For more information, see Bloomberg Economics' full Week Ahead for Asia

Europe, Middle East, Africa

Inflation data will also be in focus for Europe: In addition to the August figures for the region's major economies – Germany, France, Italy and Spain – figures are also expected for the 20 countries of the eurozone as a whole.

The Union is expected to see a decline from the July rate of 2.6%, which would pave the way for the ECB to cut interest rates for the second time this cycle at its September meeting.

Such expectations are reinforced by the continent's economic woes. While the purchasing managers' index received an unexpected boost in August thanks to the Paris Olympics, the underlying weakness is likely to persist beyond this temporary rebound. Early in the week, there will be news on production and sentiment in Germany – the region's current weak spot.

Speakers expected to comment on monetary policy and recent changes in the economy include ECB Governing Council members Joachim Nagel and Klaas Knot, and Executive Board member Isabel Schnabel.

In Eastern Europe, Hungary is expected to leave its key interest rate at 6.75 percent. The situation is similar in the Middle East: The Israeli central bank is expected to leave its key interest rate at 4.5 percent.

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In Africa, inflation figures for August from Kenya and Uganda and second-quarter GDP figures from Nigeria will be released.

• For more information, see Bloomberg Economics’ full Week Ahead for EMEA.

Latin America

Brazil's central bank will publish its weekly survey of economists on Monday. Bank President Roberto Campos Neto said this month that inflation expectations were not locked in and that central banks were prepared to tighten monetary policy if necessary.

Brazil's mid-month inflation data on Tuesday could show a slight decline from July's 4.45 percent, still well above the 3 percent target. Analysts are revising their interest rate forecasts upwards, while traders expect a rate hike as early as next month.

Because of the fiscal gap, Brazil's fiscal data is in the spotlight – the July figures are due to be released next week. Economists surveyed by the central bank do not expect there to be an annual nominal or primary budget surplus until the 2027 forecast period.

The main event in Mexico will be the central bank's quarterly inflation report. New forecasts are unlikely so soon after the revisions in the bank's August 8 communiqué following its decision, but policymakers could revisit GDP estimates.

Chilean retail sales are expected to show positive year-on-year growth for the seventh consecutive month in June, after nearly two years of declines.

• For more information, see Bloomberg Economics’ full Latin America Week Ahead.

— With support from Robert Jameson, Laura Dhillon Kane, Zoe Schneeweiss, Paul Richardson and Brian Fowler.

(Updated with Fed spokespersons in eighth paragraph.)

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