With US inflation higher than expected, we take a look at markets and spotlight a few of the most significant events in the last few weeks.
US inflation broadened in August, suggesting more rates rises to come
Annual US inflation was higher than expected in August, with headline CPI rising by 8.3%. This was lower than July’s annual inflation reading, but markets had expected recent falls in energy prices to deliver a larger pull-back in inflation. Instead, core inflation, which strips out volatile energy and food prices and is generally more persistent, rose by 0.6% in August - double market expectations.
August’s US inflation data suggests that recent interest rate hikes are not yet applying downward pressure on demand or core inflation, and that the US Federal Reserve will need to tighten financial conditions further in order to reach the desired effect on the economy and prices. Equities sold off as expectations for future interest rates hikes rose following the inflation data release.
UK retail sales fall sharply as consumers face inflation squeeze
UK retail sales excluding auto fuel dropped by 1.6% in August as surging prices put pressure on disposable incomes. This means consumer spending has fallen by 5.0% over the past 12 months. In terms of the composition of spending, sales in food stores contracted by 0.8% while non-food stores fell by 1.9%. This highlights the continued weakness of the UK economy, a situation that has resulted in sterling hitting a 38-year low versus the US dollar.
The figures also throw a spotlight on the difficult situation facing policy-makers in the UK, where the government is trying to stimulate sluggish growth while the Bank of England (BoE) is trying to control inflation, which is running at 9.9% year-over-year. The BoE is expected to raise interest rates by 0.5% later this week.
Macro data refocused investor sentiment last week, emphasising that there is more tightening of financial conditions to come before inflation comes down towards target. The US S&P 500 index fell by 4.8% while the European EURO STOXX 50 index fell by 4.0% and the UK FTSE 100 fell by 1.2%.
There was relatively little refuge elsewhere as inflation data triggered losses in fixed income markets and fears of recession took commodity prices generally lower.
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