Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
UK inflation hits a 40-year high
UK inflation as measured by CPI reached 9.0% in April, a 40-year high but slightly below consensus estimates of 9.1%. As expected, the largest driver of this was the 54% increase in the energy price cap to reflect the substantial increase in wholesale gas prices, which contributing 2.5% to the overall level. However, there were also increases in the price of food, restaurants and hotels and recreation. Core inflation, which strips out energy prices, rose to 6.2% year-on-year, up from 5.7% in March.
Whilst April marked the first month for some time that inflation did not surprise to the upside, the price pressures felt by consumers are not abating, and may indeed worsen if the energy price cap is raised again in October. The 2.5% increase from March is in itself larger than the 2.0% annual change that the Bank of England targets. Given that the Bank had forecast a 9.1% rise in April and baked this into its projection that inflation will peak above 10% by the end of the year, it seems unlikely that this slight miss will alter the Bank’s dovish sentiment.
In May, UK household confidence fell to an all-time low, as measured by the GfK sentiment survey. Whilst retail sales data is 4.8% above the pre-COVID levels seen in February 2020, aside from auto fuel it has stagnated over the past eight months, adding to concerns of an impending recession.
It was another volatile week in markets with the S&P 500 briefly falling into bear market territory and ending the week down 3%. Companies that slashed earnings forecasts, such as US retailer Target, were punished by investors fearful of the prolonged impact of inflation on consumer sales.
Bonds also had a negative week, particularly longer-dated government bonds, with over 10-year gilts down 2.1% as measured by the BAML 10+ year benchmark
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