Central bank decisions and inflation data dominate the coming week

The coming week is packed with significant events. Canada's inflation data arrives on Monday, followed on Tuesday by the U.K.'s claimant count change, average earnings index 3m/y, and unemployment rate.

Wednesday brings the latest U.K. inflation figures and U.S. retail sales month-on-month. The main event that day is the Federal Open Market Committee meeting.

Thursday sees New Zealand's GDP quarter-on-quarter and Eurozone inflation data. The U.K. will focus on the Bank of England's monetary policy announcement, while the U.S. releases unemployment claims, building permits, housing starts, and pending home sales month-on-month.

On Friday, Japan publishes national core CPI year-on-year, then the Bank of Japan's monetary policy announcement.

For Canada, the consensus for consumer price index month-on-month is -0.1%, compared with the previous 0.5%. Median CPI year-on-year is seen staying at 2.0%, and trimmed CPI year-on-year is also expected to hold at 1.9%. Common CPI year-on-year is forecast at 2.7%, unchanged, while core CPI month-on-month is projected at 0.2%, matching the prior reading.

Gasoline prices edged down from July but are still much higher than a year earlier. Food inflation is forecast to remain near 3.0%. The BoC will watch these figures to gauge whether higher energy costs are spreading into wider inflation; so far, spillover effects appear limited.

The central bank will continue to rely on data when considering the rate path. Analysts predict the BoC will hold rates steady for now, with gradual increases anticipated next year as the economy strengthens. Still, an earlier hike is possible if the labor market and broader activity keep improving.

Higher oil prices are increasing inflation risks, but there is not enough evidence that energy costs are substantially spilling over into prices beyond a few areas such as air travel.

For the U.S., core retail sales month-on-month are expected at 0.5%, compared with a prior -0.3%. Headline retail sales month-on-month are forecast at 0.8%, versus -0.6% before.

Consumer spending remains robust. July's retail sales drop was mostly due to lower gasoline sales and a short-lived decline in online shopping. Excluding gasoline, sales were up 4.4% year-to-date through July.

Wells Fargo analysts project a 0.7% rebound in August retail sales, though higher fuel costs and inflation will cap the increase. Still, given a stable labor market, consumer spending seems to be holding firm.

At this week's FOMC meeting, a 25-basis-point rate hike is expected after the latest inflation figures beat forecasts. Core CPI came in at 0.29%, lifting the three-month annualized rate to 2.0%. Although much of the increase came from wireless services, the data cannot be dismissed.

Core PCE also seems to be above the Fed's preferred range, with a three-month annualized rate of 2.7–2.8% and the year-on-year figure probably staying above 3%. Rising oil prices are adding to the inflation picture.

The Summary of Economic Projections is not expected to show major revisions to growth, unemployment, or inflation forecasts. But the median dot for 2026 could increase to about 4.125%, indicating another rate increase after September. The Fed would still probably anticipate some easing from 2027 as inflation slowly moderates.

Greater uncertainty surrounds the period after next week. Additional rate increases appear to be the baseline, but a single hike is still possible if inflation improves. In the end, coming inflation data will decide whether the Fed continues tightening or halts after September.

At its meeting this week, the BoE is expected to hold rates at 3.75%. Inflation remains worrying, despite some moderation in services prices.

July's CPI was 2.9%, core inflation 2.6%, and services inflation 3.4%. August data are expected to rise, with headline CPI forecast at 3.2% and core inflation at 2.7%.

Wage growth will also be key, especially if it begins to pick up again. Meanwhile, rising bond yields and mortgage rates indicate that financial conditions are already tightening, reinforcing the argument that policy is restrictive even without a rate increase.

Given that July GDP and PMI figures suggest a strong start to the third quarter, the BoE is still expected to increase rates in Q4. The central bank may adopt a somewhat more hawkish stance this week, and ongoing energy and food price pressures could raise the risk of additional tightening.

ING analysts, however, predict the BoE will be less hawkish than markets expect. They argue that while higher energy costs could drive U.K. inflation to near 4% this winter, there is little evidence that the shock is broadening. They point out that energy-intensive inflation is declining, food inflation has dropped sharply, and wage growth is near levels consistent with the BoE's target.

ING also cites a fragile labor market, weakness in rate-sensitive areas, and continued fiscal tightening as signs that current rates are already restrictive. Given this, it expects the BoE to hold rates steady this year; the main risk to that outlook is if energy prices fall and become less volatile.

At this week's meeting, the BoJ is widely expected to increase its policy rate by 25 basis points to 1.25%. Rising energy prices and pressure related to yen intervention are adding urgency to normalization, but analysts caution that markets may be factoring in too rapid a hiking cycle.

In Japan, inflation figures have ticked up again, with headline and core CPI expected to come in around 2.0% in August. Domestic demand, however, remains weak. Second-quarter growth was bolstered mainly by external demand and AI-linked exports and investment, while private consumption was flat. Wage data were mixed: headline growth was stronger, but same-sample growth moderated.

Wells Fargo analysts see rates hitting 1.75% by April, with sluggish domestic demand supporting a gradual pace. Nonetheless, persistent inflation or renewed yen weakness could accelerate the timeline.

ING analysts caution about the possibility of a 50-basis-point rate increase, though 25 bps is still their base case for this meeting, followed by two additional 25 bps hikes in January and April. A bigger one-time move or consecutive hikes in September and October could be aimed at pushing USD/JPY lower and reducing the need for more foreign exchange intervention.