Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
ECB to remain on hold despite inflation rising to above 4%
Eurozone inflation positively surprised again in October, with consumer prices rising 4.1% compared to the level last year. This was greater than economists’ expectations of a 3.7% increase and is the fastest rate of price growth since June 2008. The main driver was energy inflation, as electricity and gas prices both continued to increase. Stripping out the effect of volatile energy prices, core inflation rose to 2.0% on the year, once again bringing consumer price growth to its highest level since 2008.
Rising consumer prices has exerted pressure on central bankers this year to respond and tighten monetary policy and counter the possibility of a sustained high inflation. In Europe, ECB President Christine Lagarde commented, following the release, that “conditions to raise rates are very unlikely to be satisfied next year” but conceded that inflationary pressure was “unwelcome and painful”.
UK consumers continue to spend in the face of rising inflation
Similar to price action in Europe, UK inflation rose 4.2% in the 12 months to the end of October, up from 3.1% in September. The increase in the energy price cap was among the factors contributing to materially higher inflation, along with rising prices of education and transport. Supply chain disruption was also shown to be having an impact on prices, as the ONS chief economist highlighted that “costs of goods produced by factories … have also risen substantially”.
Although higher prices can pose a threat to economic growth if they discourage consumers from spending, this is seemingly having a limited impact so far. UK retail sales data showed that consumption was 1.3% above the same time last year, boosted by early Christmas shopping, more cinema trips and increased overseas travel. This brings UK retail sales to 6.3% above their pre-pandemic peak. Moreover, UK consumer confidence data (GfK survey) for November showed that consumers’ views on the general economic situation improved markedly in the last month.
Renewed COVID-19 cases and social distancing restrictions in Austria led European equities down over the week. Within European equities, the news heralded a return to the classic ‘stay-at-home’ playbook as reopening stocks slipped. Globally, growth stocks and technology stocks were the best performing.
The price of oil (Brent Crude) fell by 4.3% last week following the news that President Biden was considering tapping the US strategic reserve in an effort to curb higher energy prices and rising inflation. The President is due to give a speech on Tuesday considering the economy and prices which should provide more detail.
Look out for next week’s update, where we’ll be focusing on central bank meetings and PMI survey data from Europe.
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