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Softer inflation?

22 May 2024 | 5 minutes to read

A good week for

  • Equities broadly continued to rally, led higher by Asia-ex Japan (+1.7%) and emerging markets (+1.4%)
  • Bonds also edged higher, with gilts gaining +0.5% and index-linked gilts +1.3%

A bad week for  

  • UK equities drifted -0.1% lower
  • The US dollar drifted c. -0.8% lower on a trade weighted basis

US inflation

US inflation remains in focus, after the Fed left rates unchanged at the May meeting. While the Fed’s statement was little changed from the prior gathering, it did acknowledge that less progress had been made in reducing inflation than policymakers expected.

In light of this, April’s CPI (Consumer Price Index) print came as something of a relief to markets. Headline CPI slowed to 3.4% from 3.5% on a year-on-year basis, with core inflation slowing to 3.6% from 3.8%. On a month-on-month basis, CPI slowed to 0.3% from 0.4%.

Looking at the detail of the print, a main driver of the slowdown was shelter, which cooled to 5.5% y-o-y from a peak of 8.2% in March 2023. Shelter makes up a third of the basket and is expected to slow further. Food beverages (14% of the CPI basket) also slowed to 0.02% m-o-m, from 0.1%, taking the y-o-y rate to 2.2% from a peak of 10.9% in August 2022. “Other services” (9% of the basket) slowed to 3% from a peak of 4.7% a year ago, while autos (8% of the basket) slowed significantly, falling -2.4% y-o-y and down from a peak of 23.7% in Feb 2022. All in all, despite the impact of higher producer prices, this makes it likely that the PCE index (Personal Consumption Expenditures Price Index), the Fed’s official inflation indicator, will slow to around 0.25% m-o-m in April.

April’s soft CPI print follows a range of other data points that suggest the economy may be slowing. Payrolls softened significantly in April, along with retail sales and credit card borrowing. Survey data has also softened, with the ISM manufacturing index slipping into contractionary territory.

We still expect the Fed to deliver some rate cuts this year, assuming economic conditions evolve as expected. We look for a further easing of owner equivalent rent and for softer survey data to translate to softer real activity data.

UK labour

As in the US, UK data show signs of easing. Last week’s labour market print saw the unemployment rate rise to 4.3% in March, up from 4.2% in February. Labour Force Survey data pointed to a 178,000 decline in employment in March while payrolls signaled an 85,000 fall in April. Despite this easing, wage growth remains relatively elevated – average weekly earnings growth remains at 6% in March, well ahead of inflation.

While the labour market does appear to be easing, other UK data is looking somewhat stronger. Business surveys have picked up, and Q1 GDP was stronger than expected, boosted by stronger real consumption spending. This in turn is likely to continue to be supported by positive real wage growth, now inflation has declined significantly.

In light of this brighter picture, we still expect rate cuts in the UK this year, though the scale of cutting may be modest.


Chinese officials are rumored to be planning a significant intervention into the property market. Year-to-date, house prices continue to weaken significantly, reflecting poor demand. However, given weaker business confidence in the sector and more restrictions on real estate funding, the inventory of homes is diminishing, which should support prices in the future. The Government is rumoured to be considering the direct purchase of housing stock, either from the secondary market or directly from housing developers. This could dovetail with government plans to increase the availability of social housing, with a budget of around RMB 1-2trn (ca. $140-280bn) expected.

Purchasing homes on the secondary market could be the best way to deliver this programme, as these homes are generally in better locations. However, purchasing directly from developers could address the issue of the developers’ incomplete projects. Around 45% of incomplete units remain unsold, and around RMB 1.5trn would be required to complete all projects.

Sentiment has improved on the back of these rumors, though nothing is confirmed.



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