Inflation in retreat

<p>Kia ora,</p><p>Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the international edition from Interest.co.nz.</p><p>And today we lead with news inflation seems to be in retreat in all major economies.</p><p>The closely-watched American <a href="https://www.bls.gov/news.release/cpi.nr0.htm" target="_blank"><strong>CPI inflation</strong></a> result for May got the benefit of falling petrol prices. The headline level came in +4.0% ahead of year-ago levels, which was marginally better than the expected 4.1% and much lower than the +4.7% level in April. From April it is only up +0.1%.</p><p>But excluding food and energy costs, American inflation was up +5.3%, so inflation clearly isn't beaten yet. Food prices rose. Still, even at this level it is their lowest since November 2021.</p><p>Faster-falling inflation levels, no matter which index you choose to watch, does support the idea that the Fed may choose to pause its current cycle of monetary tightening. That is what most analysts are picking. But +5.3% is still way above their policy target and still quite sticky, and an early signal that they have done enough might unleash a new burst of animal spirits that reignites inflation's embers. They certainly don't want that. It is no certainty they will pause on Thursday (NZT). Bond market signals aren't buying the 'pause' view.</p><p>Having said that, there certainly is no energy left in <a href="https://www.redbookresearch.com/" target="_blank"><strong>American retail sales growth</strong></a>. Revenge spending has ended. Apart from the pandemic period, same-store year-on-year growth last week is now at its lowest since the 2009 GFC period. And given inflation, in real terms it is shrinking rather fast. So perhaps a few more animal spirits are what is needed.</p><p>Lackluster conditions are not only in the US. China’s central bank unexpectedly cut its short-term policy interest rate, easing its monetary stance to