CENTRAL BANKS CONTINUE TO TALK TOUGH AS INFLATION SHOWS FIRST SIGNS OF SLOWING

INFLATION: FALLING ENERGY PRICES HELP TO EASE INFLATION

Falling fuel and energy prices are helping to slow inflation on both sides of the Atlantic. US CPI for November fell to 7.1%, down from 7.7% in October, as a sharp rise in housing costs mostly offset the big drop in energy prices. Core inflation (excluding volatile food and fuel prices) fell slightly but remains around 6% where it has been for much of the year. In the UK, CPI fell very slightly from 11.1% to 10.7% last month, as falling petrol and diesel prices helped offset most of the rise in food costs. Core UK inflation eased slightly to 6.3%, but this remains far higher than the long-term average.

Markets have been looking for signs that inflation has peaked and data from other countries including South Africa, India and Germany all showed a reduction in consumer inflation last month. Hopes that inflation may be passing its peak caused global equity markets to rally at the start of the week, as investors assess whether central banks may adopt a more cautious approach to raising interest rates. However, these gains were given back later in the week.

RATES: MARKETS LOOKING FOR SIGNALS THAT RATE HIKES WILL END

The US Federal Reserve, the Bank of England and the European Central bank all increased interest rates by 0.5% as they continue to tighten monetary policy in response to the highest inflation seen in more than 40 years. This is a reduction for all three central banks, as they all increased rates by 0.75% at their last meetings, but the rate hikes were in line with expectations.

With inflation falling and signs that economies are slowing there is speculation that the banks will soon halt their rate hikes. However, central banks are keen to talk up their determination to keep tightening until inflation is firmly under control. US Fed chair Jerome Powell warned that there will be no thought of easing until there is firm evidence that inflation is heading back to target. ECB president Christine Lagarde echoed this sentiment and promised more hikes to come. The hawkish tone caused equities fall. Due to the its weaker economy, UK rates are expected to peak earlier than the US and sterling fell against the dollar.

UK: JOBS MARKET SHOWING FIRST SIGNS OF COOLING

The UK’s jobs market is showing signs of slowing down. Unemployment has started to rise as the rate ticked up to 3.7%. The number classed as economically inactive decreased as some older workers rejoined the workforce. This may have helped reduce the number of open vacancies, although at nearly 1.2m these remain near the all-time high. Redundancies dropped sharply under the furlough scheme in 2020 but they have been gradually rising this year, which could indicate corporate weakness. Wages increased 6% in the year to October, but fell by 2.7% when adjusted for inflation.

This week nurses joined postal workers and railway workers by going out on strike. The first nursing strike in 100 years adds to the government’s headaches as the country sees the most widespread strikes in several decades. Wages are a key issue for unions as they see high inflation accelerating the erosion of members’ earnings. Government data shows public sector pay has failed to track the post-Covid recovery seen in the private sector.