Positive UK inflation news as interest rates pause

The noise

• The US Federal Reserve held interest rates steady on Wednesday but continued to signal that borrowing costs will likely stay higher for longer, putting upward pressure on market interest rates across the yield curve. Indeed, short-end treasury yields went higher, with the two-year treasury reaching its highest level since 2006. Fed Chair Jerome Powell believes that a solid economy with still strong job growth will allow the central bank to keep that additional pressure on financial conditions with much less of a cost to the economy and labour market than in previous US inflation battles.

• The Bank of England hit pause on its long run of interest rate increases on Thursday, as inflation fell, and Britain’s economy slowed. The BoE’s Monetary Policy Committee (MPC) voted by the narrowest margin of 5-4 to keep the bank rate at 5.25%, but Governor Andrew Bailey made sure to stress that the central bank did not believe that its job was done. It marked the first time in 20 months that the BoE did not increase interest rates, though the MPC have reiterated the message that it was prepared to raise borrowing costs again if needed.

• Germany is on track to generate over 50% of its energy from renewable sources this year. Despite this, Germany’s Economy Minister believes they will need to speed up the transition to reach its 2030 target of 80% renewable power generation, with the ultimate goal to meet net-zero emissions by 2045. Meanwhile, UK Prime Minister Rishi Sunak is moving to delay the 2030 ban on new gas and diesel cars. He insisted that the UK will stick to its net-zero commitment, this should prove more difficult however now that he has rolled back measures designed to meet the climate goal by 2050.

​The numbers

Source: Bloomberg, data as at 21/09/2023

The nuance

UK annual inflation fell to 6.7% in August, from 6.8% in July, coming in below market expectations that it would rise to 7%. Despite a nearly 30% increase in oil prices, domestic disinflationary pressures managed to bring headline inflation to the lowest level since February 2022. Capital Economics reported that high petrol prices did add around 0.3 percentage points to the consumer price index. This was offset however by a 0.2% month-on-month decrease in restaurant and hotel expenses as well as the price rises in food and non-alcoholic beverages slowing down. Core Inflation (stripping out volatile goods like food and energy) fell to 6.2% in August, a big deceleration from July’s 6.9% and much lower than market expectations of 6.8%.

The most recent Purchasing Managers’ Index (PMI) survey released on Friday revealed that British companies faced a significantly more challenging September than what economists had anticipated. The survey showed its lowest score since the pandemic lockdown of January 2021. Despite this, British consumers are their most confident since the start of 2022, GfK’s consumer sentiment survey indicated. Although many are still struggling with the cost-of-living crisis, they are likely turning more hopeful about the economy with inflation falling and wages growing.
 

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