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9% is high – is 10% nigh?

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • Emerging market equities recovered, gaining +1.1% in sterling terms
  • Gold gained +1.3%, bolstered by dollar weakness

A bad week for

  • The US dollar fell -1.4% in a trade weighted basis
  • US equities slid -5%, while US bonds rallied +0.6%

UK inflation

UK inflation surged higher in April, reaching 9.0% from 7.0% in March. The Consumer Prices Index (CPI) saw a 2.5% month-on-month increase, primarily driven by the 54% increase in the Ofgem price cap that came into effect in April. This saw the cost of electricity increase 54% year-on-year and gas 96%. Petrol prices increased 52.1%. While the price cap has hitherto shielded consumers from high energy prices, the structure will likely mean a second large increase in the cap in October, which will prolong the period of high inflation in the UK at a time when inflation should be falling in other countries. The Bank of England’s forecast sees CPI at 10% in the final quarter of 2022, based on the expectation of a further 40% Ofgem cap increase. Other industry forecasts predict a 30% cap increase, taking inflation to 9% once again in October. This prolonged period of high inflation is expected to weigh on activity as real incomes shrink, causing the economy to slow and spare capacity to open up. This in turn is expected to cool inflation. For this reason, some members of the Bank’s Monetary Policy Committee do not expect significant further tightening to be necessary to get inflation below 2% at the end of the forecast window in 2025.

UK labour

March employment data showed a robust UK labour market, with unemployment falling further to 3.7%. April payroll data was also strong, with the number of employees added double that which forecasters had expected. However, the Office for National Statistics (ONS) did caution that the preliminary print of 121,000 was likely to be revised down. While headline pay growth soared to 7% year-on-year, regular pay remained more muted, rising to 4.2%. This suggests that employers are offering workers one-off bonus payments instead of larger increases in salaries.

Consumer confidence

A core source of confusion for the Bank of England is the differing stories told by consumer and business data. Business data has softened only modestly, with Purchasing Managers’ Indices (PMI) data weaker in April but still well above the “50” level that signals expansion. In contrast, consumer surveys point to a sharp drop in confidence, with the GfK survey falling to the lowest reading on record. While consumers often report concerns as to the health of the economy, it unusual for them to report concerns as to their personal financial situation, as is the case at the moment. The drop in March retail sales data appeared to indicate that confidence was beginning to impact consumption behaviour, with retail sales volumes down -1.4% month-on-month. However, sales volumes staged a surprise comeback in April, rising 1.4%. Food store sales increased 2.8%, although this was driven by higher spending on alcohol and tobacco, which perhaps indicates consumers expect to socialise more at home. Looking further ahead, with consumer concern focused on high inflation rather than labour market weakness, it may be that confidence proves more resilient than the Bank of England fears.

Food prices

With no end in sight for Russia’s war on Ukraine, the outlook for global food supply is worsening. Ukraine and Russia normally produce about 30% of the global wheat supply, and are significant exporters of other grains and sunflower oil. The war is expected to disrupt the harvest, and Russian blockades at Ukrainian ports may challenge exports. Both the UN and the World Food Programme have warned of the risk of food insecurity and famine for millions of people, especially in developing countries. The UN’s Food and Agriculture Organisation recorded 14 domestic price warnings in May. These warnings mean prices of one or more basic food commodity are abnormally high, which could negatively impact access to food at national level. The warnings are currently concentrated in Africa and Latin America. While some developing countries have energy reserves, many will also face higher prices for fuel.

Brexit

UK Foreign Secretary, Liz Truss, last week announced plans to amend the Northern Ireland Protocol, which imposes a trade border between Northern Ireland and Great Britain. However, some politicians and political parties favour a more radical overhaul in order to ease bureaucracy for businesses moving goods between Great Britain and Northern Ireland. However, the pursuit of this risks a trade dispute with the EU, with further disruption and trade tariffs possible if the EU-UK deal disintegrated.

 

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