US inflation data due Wednesday is expected to shed light on the extent to which the conflict in Iran has influenced the world’s largest economy, particularly through energy prices. Economists surveyed by Bloomberg forecast the consumer price index (CPI) to have increased at an annual rate of 4.3 percent in May, marking the fastest pace in over three years. However, core inflation—which excludes volatile food and energy costs—is anticipated to remain steady at 2.9 percent.

Analysts from Citi, Veronica Clark and Andrew Hollehorst, suggest that subdued consumer demand and declining real incomes may be limiting the spillover of rising energy prices into core inflation measures. They also noted that recent increases in headline inflation partly reflect elevated prices in equities and computer software linked to artificial intelligence, rather than broad consumer goods and services. They caution that while the Federal Reserve typically adjusts interest rates to manage tightness in housing and labor markets, these areas are not currently driving inflationary pressures.

Samuel Tombs, chief US economist at Pantheon Macroeconomics, echoed this view, stating that a moderation in core inflation could reduce the likelihood of further interest rate hikes in 2024. Market expectations currently price in a single quarter-point rate increase by the end of the year. Tombs described the forthcoming data as potentially reassuring enough for most Federal Open Market Committee members to maintain the funds rate steady for the remainder of the year.

Across the Atlantic, the European Central Bank (ECB) is widely expected to raise its benchmark interest rate by 0.25 percentage points to 2.25 percent on Thursday, marking its first increase in nearly three years. This move responds to inflation data showing a rise to 3.2 percent in May, above the ECB’s 2 percent medium-term target. ECB officials, including chief economist Philip Lane and board member Isabel Schnabel, have signaled the possibility of tightening amid inflation concerns linked to the Iran conflict.

Market observers are closely watching the tone of ECB President Christine Lagarde’s post-decision comments for indications of future policy direction. Analysts at Goldman Sachs anticipate she may emphasize the need for a “measured adjustment” but refrain from offering specific guidance on the trajectory of rates, instead highlighting a data-dependent approach. Nomura analysts note that while markets price in one or two additional quarter-point hikes by year-end, the ECB is unlikely to adopt a more hawkish stance than these expectations. Lagarde is expected to balance upward revisions to inflation forecasts against downward growth projections, aiming to maintain a neutral message.

In the United Kingdom, GDP figures due Friday will provide insight into how the economy is coping with energy-related pressures stemming from the Middle East conflict. Economists surveyed by Reuters project a 0.1 percent contraction in April, following a 0.6 percent expansion in the first quarter. Deutsche Bank’s chief UK economist, Sanjay Raja, highlights that deteriorating survey data reflect rising living costs and business expenses, anticipating muted GDP growth for the rest of the year amid continued inflationary pressures on real incomes.

Political uncertainty also remains a concern, with Greater Manchester Mayor Andy Burnham poised to challenge Sir Keir Starmer for the leadership of the Labour Party and the UK premiership. Raja notes that such uncertainty could compound existing economic challenges later in the year.

Market participants are largely expecting the Bank of England to keep interest rates unchanged at 3.75 percent at its upcoming meeting. However, views diverge on the need for additional rate hikes to tackle inflation, with fewer than two quarter-point increases currently priced into markets for the remainder of 2024. Weaker economic growth data could influence this outlook.