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How Quickly is UK Inflation Decreasing?
When the June figures are published on Wednesday, investors are anticipating a slowdown in UK inflation. The question is, how rapid will this decline be?
Last month, the expectations for UK policy rates increased significantly due to strong wage numbers and persistently high consumer price inflation data. As a result, market forecasts included substantially higher interest rates to bring down inflation to the Bank of England’s target of 2%.
The government will also be closely observing the June numbers, as Prime Minister Rishi Sunak has made it a priority to halve inflation by the end of this year.
Economists surveyed by Reuters predict that UK inflation will decrease to 8.2% in June, down from 8.7% in the previous month. However, this would still be higher than the Bank of England’s forecast of a decline to 7.9%.
Economist Sandra Horsfield expects a sharper decline to 8.1%, driven by lower petrol prices and, to a lesser extent, lower food price inflation. However, she forecasts that core inflation, which excludes more volatile food and energy prices, will remain unchanged at 7.1%.
“As concerns primarily center on the sticky nature of core inflation, merely seeing lower headline inflation would not deter additional tightening,” said Horsfield. She predicts that the Bank of England will raise rates by another half percentage point to 5.5% in August, following the same increase in May. She also doubts that the MPC (Monetary Policy Committee) will be confident enough to pause raising rates in September.
Markets anticipate that the Bank of England will increase interest rates to 6% by the end of the year. In order to reverse the recent surge in interest rate expectations, which has led to higher mortgage rates, “data will have to show clear signs that disinflation is accelerating,” according to Horsfield. -Valentina Romei
Will the Euro Continue to Strengthen Against the Dollar?
This week, the euro reached a 16-month high against the dollar as traders bet that the Federal Reserve will pause its interest rate hikes before the European Central Bank does.
Since the beginning of July, the euro has risen over 2.9% against the dollar, reaching $1.1233, its highest level since March 2022. This upward trend was fueled by US inflation slowing down more than expected, reaching 3% for the year up to June.
The outlook for inflation in the eurozone appears more challenging, with consumer prices in Germany rising by 6.8% for the year up to June, exceeding economists’ forecasts. While traders still fully expect two more 0.25 percentage point rate hikes from the ECB, bets that the Fed will go beyond the widely anticipated rate hike in July have been removed.
“The euro had no difficulty at all taking out its spring high against the dollar this week,” said Jane Foley, head of FX strategy at Rabobank. She noted that ECB Governing Council members have recently expressed concerns about weakening economic data, in contrast to remarks made by ECB President Christine Lagarde. Foley believes that by September, the market may realize the eurozone’s own growth issues, a peak in interest rates, and a sudden lack of attractiveness in the euro. -Mary McDougall
What Can Retail Sales Data Reveal About the US Consumer’s Health?
The release of retail sales data for June on Tuesday will provide insights into the state of the US consumer as the labor market begins to slow down.
Economists surveyed by Reuters anticipate an overall retail sales increase of 0.4% in June compared to the previous month, following a 0.3% increase in May. Excluding the automotive sector, retail sales for June are expected to rise by 0.3%.
Bank of America analysts, however, believe that last month’s figures will be lower than estimated, partly due to the bank’s own observation of declining credit and debit card spending. According to the analysts, card spending experienced a 0.2% decline in June, reflecting the recent labor market slowdown. Therefore, Bank of America expects the Census Bureau data to show a 0.2% decline in retail sales excluding automobiles for June, and a 0.1% drop in the core control group.
Last week, the US reported a slowdown in hiring for June after months of unexpected strength. This moderate slowdown could put pressure on spending and comes amidst expectations of a recession, tight financial conditions, and slowing inflation, all of which may impact consumer spending. -Kate Duguid
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