Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US consumer prices continue to rise causing nervousness amongst consumers
The US consumer prices index (CPI) increased by 5.4% in June compared to a year ago. Economists had predicted the rate of inflation would fall from the previous level of 5.0%. Stripping out energy and food prices, which tend to be more volatile, prices rose by 4.5% over the last year. This 13-year high in CPI inflation was predominantly driven by travel-related expenses, such as airfares, and the higher price of used cars which has increased due to a semiconductor supply shortage, whichhas limited the production of newer models.
Rising inflation has for the first time started to weigh on consumer confidence, with the June reading of the University of Michigan’s consumer sentiment index falling to 80.8 from 85.5 the previous month. The university noted that the ‘accelerating inflation rate has now become a top concern’ with shoppers facing ‘sticker shock’ on a range of products. The question now for economists and investors will be whether these concerns prompt consumers to bring forward spending to avoid higher prices, which will in turn lead to higher demand and higher prices. This would make a self-fulfilling inflation spiral more likely and have significant implications for the US Federal Reserve and the potential tightening of financial conditions.
Bank of England MPC members hint at early end to QE programme
Comments from two MPC members this week have taken a more hawkish turn, with officials indicating that better than expected macroeconomic data and higher inflation may require the Bank of England to end the current QE programme before the end of the year. The current programme includes £875bn of gilt purchases that are due to be completed by the end of the year.
In contrast BoE Governor Andrew Bailey cautioned about responding too quickly to higher inflation, suggesting the transitory elements of inflation (e.g. energy price base effects) needed closer inspection.
Concerns over a resurgence in COVID-19 cases caused by the highly virulent Delta variant caused global equity markets to fall slightly over the last week. The rise in case numbers in economies that have vaccinated a significant proportion of their population – such as the US, UK and some nations in Europe – has increased fears that restrictions may need to be reintroduced in the latter part of the year. The general risk-off mood led to increasing returns from government bonds and falling stock prices of those companies who suffer most from pandemic restrictions, such as travel companies.
Oil and gas companies were the worst performers over the week, not only because of renewed virus concerns, but also as the oil price fell dramatically following the announcement by OPEC+ of their plans to increase the oil supply.
Look out for next week’s update, where we’ll be focusing on Eurozone PMIs and US inflation data.
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