Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US FOMC shift more hawkish signalling two rate rises in 2023
The US Federal Reserve surprised economists and investors on Wednesday with a shift in guidance following the Federal Open Market Committee (FOMC) meeting. The closely watched ‘Fed dots’, which charts the policymaker’s expectations for interest rates, suggested that they now expect two rate rises in 2023, having previously expected rates to lift off in 2024. Fed chair Powell was also decidedly more optimistic on the state of the US economic recovery acknowledging positive momentum and risks of higher inflation.
This is a significant shift from previous rhetoric which has been more cautious on the state of employment and focussed on the transitory nature of inflation. The response from markets has been complex. Breakeven inflation expectations unsurprisingly have fallen since the announcement, while the yield on the 10-year Treasury rose briefly on the news before falling back to its recent level of 1.5%. The latter could suggest that some investors who have been worried about the prospect of rampant inflation have been reassured by the Fed’s reaffirmed commitment to price stability.
UK inflation rises to 2.1%, above Bank of England target
The UK consumer prices index increased by 2.1% in the year to May, outstripping expectations of a 1.8% rise in prices. The increase came as a result of significant rises in clothing and footwear, as well as restaurant prices which were increased on reopening.
There was also positive data from the UK labour market this week which showed that regular pay growth rose 5.6% in April, compared with a year earlier. These numbers are flattered by comparisons to the labour market during April last year, although they were in excess of economist’s expectations of a 5.3% rise in wages.
In contrast, UK retail sales ticked down in May, falling 1.4% compared to the previous month. This compared to economists’ expectations of 1.5% increase. The fall in spending was largely due to lower spending in food stores, which could reflect people returning to eating and drink out of the home.
Eurozone inflation increases to 2% as vaccination rollout improves
The headline measure of inflation rose from 1.6% in April to 2.0% in May, as compared with a year earlier. Similar to the UK and the US, a large proportion of this was as a result of resurgent energy prices which increased 13.1% on a year earlier.
Within the Eurozone, Spain and Germany saw the largest increases in the price level as prices increased by 2.4%. Easing restrictions are likely to lead to volatility in prices over the summer months. However, as the comparisons to low energy prices this time last year roll off, this should lead to a negative effect on headline inflation.
Look out for next week’s update, where we’ll be focusing on the Bank of England meeting and June flash PMI surveys.
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