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Economic preview: Hawks’ eyes on US inflation

12:24, 17 December 2021

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Inflation chart
PCE inflation expected to rise in December – Photo: Shutterstock

In the run-up to Christmas, the data calendar next week looks sparse, but US inflation comes under the microscope for the final time in 2021 with the Federal Reserve’s favoured measure of personal consumption expenditures on Thursday.

The US and UK will report the final readings for third quarter growth on Wednesday and, on the central bank front, the People’s Bank of China (PBoC) decides on monetary policy settings on Monday.

US inflation CPE

While US inflation – as measured by the consumer price index (CPI) – soared to an annual headline rate of 6.8% in November, the Fed-favoured personal consumption expenditures (PCE) gauge for the same month – published on Thursday – is expected to rise from the 5% seen in October.

PCE habitually lags CPI as it not only measures the price rises in a basket of goods and services as reported by consumer surveys, but a broader range of expenditures from US households reported by businesses and is much less volatile.

The Fed has now accepted that inflation is not as “transitory” as previously believed and, in response to growing concerns about inflation expectations becoming entrenched, quickened the pace of its tapering of asset purchases at this week’s policy meeting.

Not surprisingly, the main contribution to October’s PCE index – up to 5% from 4.4% in the previous month – was a 30.2% rise in energy prices, while food prices increased by 4.8%.

While energy prices cooled during November as concerns over the impact on demand from the spread of the new coronavirus variant prompted a sell off on commodity exchanges, the Fed’s own projections for core PCE – which excludes volatile energy and food prices – forecasts an average 2.7% in 2022, up from a previous projection of 2.3%. Annual core PCE rose to 4.1% in October.

PBoC rate decision

Consumer confidence in China is suffering a slowdown provoked by renewed virus outbreaks in certain provinces. Retail sales in November dipped to an annual rate of 3.9% from 4.9% in the previous month.

Industry, however, has remained robust – although renewed restrictions, including factory closures in Zhejiang, are likely to provide hurdles to growth in December. But November industrial production rose by an annual 3.8% in November from 3.5% in the prior month.

While authorities in Beijing appear to be supporting accommodative measures, the People’s Bank left the interest rate on its medium-term lending facility unchanged this week when it rolled over RMB500bn ($78.4bn) loans.

“This suggests that the Loan Prime Rate is unlikely to be cut next week, but we do expect policy rate cuts over the coming months, and also a slight relaxation of quantitative restrictions on credit,” said Sheana Yue, China economist at Capital Economics.

Best of the rest

Final third-quarter GDP readings are published for the US and UK on Wednesday and revisions to previous estimates may be made. Economists expect no revision to the UK’s previous estimate of 1.3% quarter-on-quarter growth, nor to the US’s 2.1% rate.

Economic highlights 20-24 December

Monday

  • UK – Rightmove house price index December
  • China – PBoC interest rate decision

Tuesday

  • UK – public sector net borrowing November
  • Germany – GfK consumer confidence December
  • US – third-quarter current account

Wednesday

  • UK – third-quarter GDP
  • US – Chicago Fed national activity index November
  • US – third-quarter GDP
  • US – consumer confidence December

Thursday

  • UK – GfK consumer confidence December
  • Japan – leading economic index October
  • US – inflation personal consumption expenditures November
  • US – durable goods orders November
  • US – Michigan consumer confidence December

Friday

  • Australia – retail sales November

For next week’s full economic calendar, click here.

Read more: UK and Australia ink new deal to boost bilateral trade

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