CENTRAL BANKS HAVE LITTLE ROOM FOR ERROR AS THEY ATTEMPT TO CURB INFLATION

CENTRAL BANKS HAVE LITTLE ROOM FOR ERROR AS THEY ATTEMPT TO CURB INFLATION

This week inflation continued to grind higher, with price rises heaping more pressure on the embattled British consumer. Unsurprisingly confidence has dropped to record lows, a bad sign for a nation dependent on consumer spending for growth. Inflation is not a new problem and one the Bank of England should be well versed in handling; this time around, however, it has far less control. With much of our inflation being imported via commodity prices the value of the pound is a key driver, something the bank so far has failed to fix.

Elsewhere the theme of old problems with a new twist has been manifesting in the crypto markets. The technology might be new, the problems it’s facing are not. As cryptocurrencies continue to fall alongside traditional assets, the burgeoning Defi industry, consisting of overleveraged and under-regulated quasi-financial institutions, have been collapsing at pace wiping out many small investors in a hi-tech parallel to 2008. It turns out software engineering is no different to financial engineering when it comes to delivering returns that are too good to be true.

UK: INFLATION STILL RISING BUT COMMODITY PRICES BEGIN TO RETREAT

UK inflation hit 9.1% in June as household and transport costs continue to drive prices higher. Transport and housing costs account for around half the increase in CPI but inflation is spreading to other sectors. High inflation is also reflected in producer prices as the UK producer price inflation rose by 5.9% year-to-date. However, this is not as dramatic an increase as in the EU as PPI rose by 37% between April 2021 and 2022.

Commodities have been a big contributor to inflation but prices are showing signs of cooling. Brent crude fell to $110 per barrel this week, a drop of 10% from its peak of $123 earlier this month and other industrial materials like copper, iron ore and timber have also been falling in recent weeks. If this continues then input costs should also begin to ease. The Bank of England predicts that inflation will peak at 11% this autumn and falling commodity prices could be a sign that some of these pressures are starting to ease.

GLOBAL: CENTRAL BANKS STAND FIRM DESPITE RISING RECESSION FEARS

Central banks have restated their willingness to tighten monetary policy as far as needed to contain inflation. This week, Federal Reserve chair Jerome Powell told the US Congress that it is possible that inflation will continue to rise above expectations, and he sees the potential for recession in the US due to forces outside the bank’s control. In Europe, ECB chair Christine Lagarde said market volatility would not deter the bank from acting and Bank of England chief economist Huw Pill said that the bank is willing to accept lower growth as a consequence of tackling rising prices.

PMI data shows services and manufacturing output slowing in Europe but the numbers have remained more consistent in the UK. A number of commentators have been talking up the chance of recession as central bank action begins to dampen economic growth with Citigroup putting the chances of a global recession at 50%. Markets appear to be sceptical of central banks’ commitment, as yields on government debt fell as bonds rallied this week.

CRYPTO: DIGITAL CURRENCIES CRASH AS CONFIDENCE EVAPORATES

Cryptocurrencies crashed this month as bitcoin saw its price fall 30% to drop below $20,000 for the first time since July 2021, while ether (the second biggest digital currency) fell from £1,800 to nearly $1,000 in 4 days. Bitcoin has fallen almost 70% since its peak in November 2021 and is now trading below the ‘realised price’ – the average paid by buyers – meaning many investors are now showing a loss. The declines have been due to the broader weakening of investor sentiment towards riskier growth assets but the size of the drop far exceeds the fall seen in conventional assets.

Confidence in digital assets has been severely damaged following the recent collapse of the terra stablecoin and several trading platforms blocked customers from withdrawing funds. Cryptocurrency exchanges have cut thousands of jobs as trading volumes fall. Coinbase, one of the largest exchanges, announced that it will lay off almost a fifth of its workforce and its shares are down almost 90% since their peak in November 2021.