This week in markets UK inflation slows more than expected, but the cost of living still remains a concern as pressure on households remains.
US CPI surprises to the downside - hopes grow that inflation has peaked
US inflation has risen at its slowest pace in a year, rising by 7.1% for the 12 months to November and appreciably lower than October’s 7.7% annual rate. The November figure surprised economists, who had forecast a 7.3% annual increase.
The slowdown was primarily driven by core prices, with motor fuel falling by 2.1% over the month. Given recent declines in gasoline prices, forecasters are predicting a steeper decline in December’s numbers. Food prices, which have risen significantly over the year, increased by 0.5% over the month, the smallest monthly increase in 11 months.
After a series of aggressive interest rate rises this year, the US Federal Reserve (Fed) might now opt to slow the pace of rate rises. Markets are anticipating a 0.5% rate rise in December, breaking from the 0.75% rises seen at the past four meetings. One factor which may lead to calls for a steeper rise is the labour market, which remains tight and is still experiencing pressure from wage inflation.
UK inflation slows more than expected, but food prices continue to rise
UK inflation dropped to 10.7% over the year to November, down from October’s 11.1% increase and beating expectations of a 10.9% annual increase. The fall was driven by transport inflation, which went from 8.9% to 7.2% over the year as fuel and used car prices decreased.
Whilst this is a welcome decline, pressure on households continues, with food and non-alcoholic beverage prices rising another 1.1% over the month to bring the annual increase to 16.4%.
This adds to the confusing picture facing the Bank of England’s Monetary Policy Committee (MPC) when they meet to consider their next rate rise today. As in the US, pay growth continues to add inflationary pressure, as does continued concern over gas supplies and energy prices. However, many economists believe the UK is going into a protracted recession, if not already technically in one. On balance, the market believes there will be a 0.5% rate rise but the MPC’s votes will be split, reflecting the tightrope that committee members walk.
Most major markets ended last week in negative territory as they awaited inflation news. In the US, the S&P 500 declined by more than 3%. However, following the latest US CPI figures the market bounced almost 1%, and the index finished the week to 13 December up over 2%.
The Chinese equity market continues to make up ground following the relaxation of Covid rules, ending last week up almost 7%, but remains down over 20% for the year.
The Brent Crude oil index saw a steep decline of over 10% last week.
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