INFLATION REMAINS IN THE SPOTLIGHT AS ECONOMIES CONTINUE TO TICK OVER

INFLATION REMAINS IN THE SPOTLIGHT AS ECONOMIES CONTINUE TO TICK OVER

This week there was a modicum of good news; inflation in the US continued to abate with the fabled “soft landing” of the US economy still possible, despite a slight uptick in unemployment claims. In the UK surprisingly robust growth figures caught out most people, with the data not reflecting either the market consensus or general mood of the country. It is baffling that a large increase in interest rates, a huge squeeze on the consumer as bills eat into disposable income and high energy and input prices aren’t having the effect expected. There could be some underlying growth factor no ones noticed or the negative impacts of the last year are just taking longer to manifest.

Elsewhere inflation continues to be the dominant theme, with persistent deflation being a real possibility in China while in parts of Europe it has fallen below target and the falling cost of housing likely to continue to put downward pressure on inflation in the US. Despite this a rise in energy prices, with both oil and gas increasing significantly the last few weeks, could mean the inflationary beast has a bit of fight left in yet.

China’s post-pandemic growth prospects have failed to match the expectations that were widely held by markets. The consumer price index fell into deflation at -0.3% year on year in July; a month earlier inflation stood flat at 0%. In addition the producer price index, which signals the value of goods as they leave factories, was -4.4%. While deflation would currently be welcomed by western economies, in China’s case it represents an economy that has failed to gain momentum after two years of strict anti- covid measures and an overleveraged property sector.

Imports fell 12.4% in July, which also represents weaker Chinese demand. China’s internet giants have pushed against this trend after ordering $5n worth of Nvidia chips, to be used to develop generative AI systems. Companies such as Alibaba and Tencent are racing to fill their chip stocks following the White House’s announcement of a ban on US investment in China’s quantum computing, advanced chips and artificial intelligence sectors.

US: HEADLINE INFLATION RISES TO 3.2%

The annual rate of inflation in the US jumped from 3% in June, to 3.2% in July. This is the first rise in 13 months. However, markets were excpecting a rise of 3.3%, and core inflation (which excludes volatile food and energy costs) fell 0.1% to 4.7%. The better-than-expected inflation reading prompted a positive reaction in markets, with the expectations that the Federal Reserve will keep interest rates unchanged. At the open of trading, the S&P 500 index rose 0.7%, while the tech-focused Nasdaq gained 0.8%.

A strong contribution to falling headline inflation figures globally have been the decline in energy prices. We’ve seen that trend reverse this week with European gas prices surging nearly 40%, due to the prospect of industrial action at Australian offshore gas and liquified natural gas (LNG) facilities disrupting supply levels. Much of Europe’s energy reliance now rests on LNG after it has been successful in reducing its dependence on Russian energy. Year-on-year European gas prices are still down considerably, over 80%.

EQUITIES: TIGHT FINANCIAL CONDITIONS CHALLENGE WEWORK

Shares of WeWork, the darling of the 2010’s trendy-start-up-boom-era, have fallen 20% after it reported it faces “substantial doubt” it can remain in business. The firm commanded a $47 billion valuation as workers first returned to offices in the ‘new normal’ post-pandemic world. Now, with the ‘new-new normal’ reverting to hybrid home and office work, excess supply in commercial real estate and heighted competition in the flexible working space, the firm has declared it needs to improve its profitability and finances over the next year by raising further capital.

Companies are under strain amidst tighter financial conditions which is developing into a common theme this year, and it’s no surprise after the pace at which central banks have raised interest rates to combat high inflation. In the UK, discount retailer Wilko has collapsed into administration after it has been hit by the inflationary pressures and supply chain challenges. Hopes for a rescue deal have failed, which has put 12,500 jobs at risk.