The Federal Reserve will raise US interest rates next week, probably by half a percentage point, while also promising more rises and the start of a reversal of quantitative easing.
Figures in the week will show some reasons why it is doing this. On Monday, the ISM survey is likely to show that the manufacturing economy is still doing well but that prices are rising very sharply. And Friday’s employment report will show that the economy is still creating lots of jobs, with the unemployment rate falling to its pre-pandemic low of 3.5 per cent. Partly because of this, wage growth is accelerating: Friday’s figures will show it to be nearly 6 per cent, well above its pre-pandemic levels.
There is, though, a complication here. Wages are falling in real terms. And by another measure, the labour market is not so tight: the proportion of the population in employment will remain well below its pre-pandemic level. One quandary for the Fed is interpreting this: does it means people have genuinely left the labour market (which is potentially inflationary) or does it mean there is hidden unemployment, which would hold down inflation?
We’ll also see some pressures for higher interest rates in the eurozone. Purchasing managers there will report that prices are still rising sharply, whilst official figures could show that the unemployment rate, at around 6.6 per cent, is near a 50-year low.
Other data, though will be more mixed. Purchasing managers will report that while the services sector is growing well, manufacturing is almost stagnating. Official figures from Germany, showing a dip in factory orders and industrial production, are likely to corroborate this. And official figures for the region as a whole could show that retail sales fell in March, and have flatlined since the summer.
UK numbers might also pave the way for another rate rise. Purchasing managers are likely to confirm that the economy is still growing and that prices are rising sharply.
It’s not just prices of goods and services that are rising, though. So too are house prices. Although the Halifax could report that house price inflation has levelled off at around 11 per cent, prices in the past few months are still strongly up. This is because a shortage of supply is offsetting a lack of affordability. It’s likely, though, that rising mortgage rates, uncertainty and a squeeze on real incomes will reduce price inflation over the next few months.
