DIVERGNCE IN INFLATION DRIVERS BETWEEN THE UK AND US PRESENTS A DIFFERENT SET OF PROBLEMS

DIVERGNCE IN INFLATION DRIVERS BETWEEN THE UK AND US PRESENTS A DIFFERENT SET OF PROBLEMS

This week the UK continued to scorch in hot weather which resulted in drought warnings and hosepipe bans. The UK economy cooled and reported the first quarterly fall in growth for a year contracting 0.1% for the second quarter. Human healthcare and social work activities were the main detractor from growth, and consumer sentiment also weighed down the economy. Tourism and other leisure activities performed well to offset weakness. Despite the negative quarter the economy grew by 1.9% for the year.

China and Taiwan tension cooled following the completion of military exercises and easing of a tit-for-tat escalation in the region. Pelosi’s visit had raised pressure between the two nation states. Earlier in the week soothing comments from the US, and a visit to China from Taiwan’s Beijing-friendly opposition party to support Taiwanese citizens living in China, preceded a reduction in the geopolitical friction.

US: INFLATION EASING GIVES CENTRAL BANK FOOD FOR THOUGHT

On Wednesday the latest CPI data were released for the United States. Prices increased at 8.5% year-on-year to July, 0.6% slower than June, largely due to a fall in petrol prices. The yearly figures were below economists’ expectations. Markets reacted positively to the news with the S&P 500 rising 1.6%. Government bonds shared the enthusiasm; the 10-year yield fell and its price increased.

Declining yields on treasury bonds tentatively suggest that aggressive rate rises by the US central bank, the Federal Reserve, have eased. The market’s expectations for year-end interest rates and the magnitude of next month’s rate rise, softened. The core measure of CPI – which excludes volatile food and energy prices – remained at 5.9%. Combined with a strong employment report the readiness to ease the pace of interest rate rises is not certain. High demand for employees will raise concerns that inflation has become entrenched – something the Fed will want to prevent.

UK: ENERGY PRICE CAP SET TO SQUEEZE HOUSEHOLDS FURTHER

The UK is set to continue with a fresh bout of inflationary pressures. One set of forecasts for the default tariff price cap show an increase from £1,971 at present to £3,582 in October. Despite the 80% increase, the cap is expected to rise further, hitting £4,266 in January 2023 before peaking at £4,427 in April.

Adding to the pressure is Putin’s threat to cut gas flow to Europe during the essential winter months. Reduced supply of gas to mainland Europe has been imposed though capacity reduction through the Nord Stream 1 pipeline. Despite the gloomy outlook European gas storage levels have made considerable progress and now stand above August 2021 levels. It will be a race to acquire enough gas to last the cold winter months and to diminish Russia’s leverage over Europe and UK.

GLOBAL: SUPPLY CHAIN PRESSURES SHOW SIGNS OF ALLEVIATING

There is some positive news for consumers. Supply-chain issues brought about by the pandemic recent data confirms the problem is abating. The Freightos shipping index, which measures the cost of transporting a shipping container, is down 45% from last year. Additionally, the number of vessels queueing outside the port of Los Angeles has dropped 75% year-to-date, despite recording its busiest June in a century. The Global Supply Chain Pressures Index, which incorporates a number of different metrics, shows significant easing throughout 2022.

The news is a relief for global economies as lockdown induced supply chain issues began early inflationary pressures, pushing prices significantly higher. Weaker consumer demand and freedom from pandemic quarantines will help to contribute to creating much needed spare capacity. This is already helping to see a decline in delivery times – 29.2% of US factories reported improvements for July, up from 11.1% in June.