The noise
-
Figures for US inflation were released on Wednesday, with consumer price increases falling to 4.9% in the year through April, coming in slightly below consensus expectations of 5%. The fall is the tenth consecutive month of falling inflation in the US, and demonstrates the moderating effect of the tightening of interest rates.
-
The Bank of England (BOE) followed decisions by other central banks to increase the base interest rate in the UK on Thursday, by 25 basis points to 4.5%. This is a record-breaking 12th successive increase, and sees the interest rate at its highest point since 2008. At the same time, the BOE’s Monetary Policy Committee (MPC) updated its forecast for the UK economy from a marginal recession to 0.5% growth.
-
In a report published Wednesday by KPMG and the Recruitment & Employment Confederation (REC), companies in the UK are increasingly relying on temporary and short term workers to meet recruitment needs. In April, the hiring of permanent staff declined at the fastest rate in the last two years, whilst the increase in billings from temporary staff jumped at a rate not seen since September. Rising interest rates and a previously flat economic outlook for the UK have driven this decline. The REC said this highlighted the uncertainty felt by many employers who need to hire, as evidenced by the growing vacancies, but want to hedge their bets.
The numbers
The nuance
The aggressive interest rate hikes by the large central banks are starting to put the brakes on inflation. What is still unclear is whether the higher rates and slowing inflation are the precursor to the much discussed potential recession. Despite the slowdown of price increases, the positivity of the record-breaking change in forecasted UK GDP by the MPC, and the encouraging news of a sharp drop in US inflation, the figures of 10.1% and 4.9% respectively are still well ahead of the BOE and Fed’s targets of 2%. This is combined with the continued fallout from the failures of US regional banks, which is being regarded by some economists as the ‘canary in the coal mine’ indicator of worsening credit conditions and subsequent further market contraction.
The slowing-but-sticky levels of inflation in conjunction with yet more interest rate hikes represent a major challenge for British households. With food and non-alcoholic beverages inflation reaching 19.2% in March, essential spending costs remain elevated. Consumers will be forced to borrow more to meet outgoings, and will subsequently be paying more for the debt. This cycle of increased consumer borrowing and spending is one of the many factors responsible for the BOE’s forecast of declining-but-persistent inflation into late 2024.
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.