Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
UK inflation continues to surge, driven by both rising services and goods prices
UK CPI hit a 30-year high in March, at 7.0%, ahead of the Bank of England’s (BOE) February projection of 5.7%. Whilst much of this is driven by soaring energy and commodity prices linked to the war in Ukraine, core CPI, which strips out the volatile energy prices, rose to 5.7% year-on-year. The broadening nature of price increases was evidenced by the fact that 75% of the basket of goods which CPI measures saw an increase of 3% or more.
Prices of both services and goods rose, with the former seeing a 9.4% year-on-year increase, the fastest rise in the 34-year series. Transport and utilities saw the biggest increase, as oil, as measured by Brent Crude, jumped from $65 a barrel 12 months ago to $117 in March. The increase in energy costs also impacted producer input prices, which surged to 5.2% month-on-month. Analysts believe that this increase has not been fully passed on to consumers, so have warned that the peak is yet to come. This would worsen significantly if the EU and UK decide to impose an embargo on Russian oil and gas.
It now seems almost certain that the BOE will raise the interest rate by a further 25 basis points at its next meeting in May. This would raise its base rate to 1.0%. Further to this, it may decide to accelerate its quantitative tightening programme by starting to actively sell gilts on its balance sheet, rather than just letting them run off as they reach maturity. However, it is likely the BOE will wait until bond market volatility has subsided before taking this step.
US CPI spikes at the headline level
US CPI rose to 8.5% year-on-year, with rents, major appliances and airline fares showing the steepest increases. However, used car prices fell and new car and restaurant price rises have started to slow. Unlike the surges seen in the UK and Europe, daily gasoline prices have been declining since mid-March, and look set to put downward pressure on this month’s CPI.
Core CPI, which strips out the more volatile commodity prices, rose 0.3% month-on-month, the smallest increase for six months, and below consensus estimates of 0.5%. One of the largest recent drivers for the increase in CPI, used vehicle prices, declined by 3.8%, however it remains 45% above its 2019 average. A tight labour market and rising wages are continuing to place broad-based inflationary pressure on goods and services, compounded by lingering supply chain bottle necks.
The European Central Bank continues to hold rates at historic lows
Unlike its American and British counterparts, the European Central Bank (ECB) decided to maintain interest rates at -0.50% despite surging inflation across the continent. It also chose to maintain its monetary support and not increase the rate at which it is winding down its asset purchasing programme, which is due to conclude in the third quarter of this year. However, there remains some ambiguity as to exactly when the final purchases will be.
Whilst inflationary pressures continue to surprise to the upside, with German CPI hitting 7.3%, bank President Christine Lagarde said that so far this has not fed through to wages, despite labour market tightness. The market is now pricing 65 basis points of rate rises by the end of the year.
Both global equity and fixed income markets fell last week as renewed fears of inflation caused concern amongst investors. The yield on the 10-year US Government Bond – often used as a benchmark discount rate for global risk assets – rose to above 2.8%, compared with the 1.5% yield at the beginning of 2022. This fed through into equity markets as defensive, value-orientated stocks generally performed better than expensive, growth stocks.
At a regional level, UK equities continued to perform well, underpinned by the large cap oil and gas companies which have benefited from the war in Ukraine and resultant increase in oil and gas prices.
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