Tag: Inflation

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Does the U.S. jobs boom raise doubts about rate cuts?

U.S. job creation vs inflation and interest rates

The U.S. economy is on a rip, with employers adding around 303,000 jobs in March 2024 – the largest increase in almost a year.

As the world’s largest economy continues to surge, questions arise about the Federal Reserve’s next move regarding interest rates.

Stronger-than-expected Job Growth

The unemployment rate fell to 3.8%, indicating strong job growth in several sectors such as health care, construction, and government. While economists had predicted job gains of approximately 200,000, the actual numbers have easily exceeded those expectations.

The labour market’s surprising resilience has caught analysts off guard, leading to speculation about the timing of interest rate cuts.

Fed’s Dilemma

The Federal Reserve has held interest rates in a range of 5.25%-5.5%, the highest level in over two decades. Initially, the Fed raised rates sharply in 2022 to curb inflationary pressures. However, the subsequent cooling of price inflation (down to 3.2% in February) without a significant spike in unemployment has complicated matters. The central bank now faces a delicate balancing act.

Delayed Rate Cuts?

The significant increase of 303,000 in non-farm payrolls for March 2024 reinforces the Federal Reserve’s stance that the robustness of the economy permits a gradual approach to interest rate reductions.

The Fed had been expected to initiate rate cuts this year to mitigate the impact of high borrowing costs. However, the stronger-than-anticipated economic performance suggests that rate cuts may not occur until the second half of this year.

Labour Market Dynamics

U.S. government spending in areas like high-tech manufacturing and infrastructure has bolstered the labor market. Additionally, an influx of more than three million immigrants last year has expanded the workforce, potentially keeping wage pressures in check. In March, average hourly pay rose by 4.1% year-on-year, consistent with expectations and near a three-year low.

America’s Comeback

President Joe Biden hailed the latest job figures as a “milestone in America’s comeback.” However, some market analysts argue that the strong jobs growth could complicate efforts to return inflation to the Fed’s 2% target. Some analysts even speculate that rate cuts may not materialize until 2025.

Global Implications

Higher U.S. interest rates have ripple effects worldwide, enticing investors to shift capital toward America. While the Fed’s in-tray still has some warnings, the delay in rate cuts reflects the economy’s underlying strength.

The U.S. jobs boom presents a conundrum for policymakers. Balancing economic vitality with inflation control remains a delicate task, and the Fed’s decisions will reverberate far beyond its borders.

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Euro zone inflation unexpectedly falls to 2.4% in March 2024

EU inflation

Eurozone inflation eased to 2.4% in March 2024, as indicated by preliminary figures released on Wednesday 3rd April 2024.

This decrease has increased expectations that interest rate cuts may start in the summer 2024.

Market analysts anticipate that the central bank will commence reductions in interest rates starting in June 2024, reflecting recent communications from the ECB.

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Fed Chair Powell stresses the importance of additional proof that inflation is subsiding before cutting interest rates

Powell

Federal Reserve Chairman Jerome Powell stated on Wednesday 3rd April 2024 that policymakers will need time to assess the current inflation situation, leaving the schedule for potential interest rate reductions unclear.

Referring to the stronger-than-anticipated price pressures at the year’s onset, Powell reportedly stated that he and his colleagues are not in a hurry to relax monetary policy.

Market expectations are leaning towards the FOMC initiating policy easing this year, although adjustments to the anticipated timing and scale of reductions have been necessary due to persistently high inflation.

Meanwhile, other economic indicators, especially in the U.S. labour market and consumer spending sectors, remain robust, affording the Fed the opportunity to evaluate the prevailing situation prior to taking action.

The target rate is 2%.

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UK inflation down to 3.4% in February 2024

UK inflation

In February 2024, inflation decreased to 3.4%, a decline from January’s 4%, moving closer to the Bank of England’s self-imposed target of 2%


This reduction signifies that the cost of living is increasing at its least rapid rate since September 2021, when it was recorded at 3.1%.

Since reaching a peak of 11.1% in October 2022, the highest in 40 years, inflation has been on a steady decline. In the big inflation picture, that’s a pretty good result.

It has only taken around 16 months to move the rate from 11.1% (a 40-year high) down to just 1.4% above the BoE’s target of 2%.

The primary factor contributing to this decrease, as reported by the Office for National Statistics (ONS), is the deceleration of food price inflation.

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U.S. consumer prices rose 0.4% in February 2024 and 3.2% from a year ago

U.S. inflation

The U.S. Consumer Price Index, a comprehensive gauge of the cost of goods and services, rose by 0.4% for the month and increased by 3.2% compared to the previous year.

The annual rate was marginally higher than expected. The monthly rate was slightly above the forecast of 0.3%. This may likely direct the Federal Reserve to hold off on an interest rate reduction, at least until the summer of 2024. What will Wall Street make of it?

The core Consumer Price Index increased by 0.4% monthly and recorded an annual rise of 3.8%. Both figures exceeded forecasts by one-tenth of a percentage point.

An increase of 2.3% in energy costs contributed to the rise in the overall inflation figure. Food prices remained mostly unchanged for the month, while housing expenses saw a further increase of 0.4%.

U.S. consumer price index data for February 2024 – Month on month
U.S. consumer price index data for February 2024 – Year on year
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Powell says the Fed is not ready to start cutting interest rates yet

U.S. interest rates

In his Capitol Hill testimony on 6th March 2024, Federal Reserve Chairman Jerome Powell reiterated that was not yet time to begin cutting interest rates.

To fight inflation, which reached a rate of 9% in the summer of 2022, the central bank has significantly increased interest rates in recent times. However, prices are still stubborn, especially for things like housing and groceries.

Due to the robust economic performance in early 2024, the expected reduction in interest rates has been postponed. Instead of taking place this month, the rate cuts are now more probable in May or June 2024.

Powell reportedly said: ‘The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.’

He reiterated the pledge to lower inflation to the 2% target and keep long-term inflation expectations stable.

UPDATE

On Thursday 7th March 2024 Powell also said: the Fed is ‘not far’ from the point of cutting interest rates

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Inflation in the euro-zone eased to 2.6% in February 2024

Euro zone inflation

Euro zone inflation eased to 2.6% in February figures showed on Friday 1st March 2024, but both the headline and core figures were higher than expected.

Core inflation

Core inflation, removing the volatile elements of energy, food, alcohol and tobacco was 3.1% above the 2.9% rate expected.

The February figures will be a headache for EU policymakers, as core inflation is still holding above 3% even as the headline rate moves toward the ECB’s 2% target.

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U.S. inflation up 0.4% in January 2024 as expected and up 2.8% year to-date but coming down ever-closer to 2% target

U.S. inflation

U.S. inflation climbed in line with expectations in January 2024, according to the preferred measure the Federal Reserve uses to make decisions on cutting interest rates.

The personal consumption expenditures (PCE) price index, excluding food and energy costs, increased 0.4% for the month and 2.8% from a year ago, as expected according to analyst’s predictions.

Headline PCE, including the volatile food and energy categories, increased 0.3% monthly and 2.4% on a 12-month basis according to the numbers released Thursday 29th February 2024 by the Commerce Department’s Bureau of Economic Analysis.

The data was released amid an unexpected jump in personal income, which rose 1%, well above the forecast for 0.3%. Spending decreased 0.1% vs. the estimate for a 0.2% gain.

U.S. inflation target is 2%.

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Is the fight against inflation failing – or does it get much harder towards the end?

Stubborn inflation

Is progress on U.S. inflation stalling?

That’s the fear spreading through Wall Street as another inflation reading on Friday 16th February 2024 came in hotter-than-expected.  

The producer price index rose 0.3% in January 2024. The largest increase since August 2024 and higher than the 0.1% forecast. Excluding food and energy, core PPI jumped 0.5%, again well above consensus.

Stubborn

It is yet another sign of stubborn price pressures across the broader U.S. economy. And it came just days after an unexpectedly hot CPI reading, which gave markets a nasty jolt.  

Both data have stoked investor worries on whether inflation is firmly under control. The latest developments also reinforce the Fed’s caution that it will need to see more evidence of disinflation before committing to lower rates.

Mohamed El-Erian, Allianz chief economic advisor, posted on X that like the CPI data, the PPI report was a further indication that the last mile of the inflation battle is more complex than many had assumed (and still assume).

Some economists even argue the jump in Friday’s data will likely push January’s personal consumption expenditures price index, the Fed’s preferred inflation gauge.

The PPI data means we can finalise our core PCE forecast for January, at 0.32%. That would be the biggest increase since September. But the three months since then all saw much smaller gains.

But investors will have to wait until later this month for PCE data when it’s released on 29th February 2024.

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UK inflation holds steady at 4%, lower than expected

UK inflation statistics

The UK’s inflation rate remained at 4% in January 2024, despite the first monthly fall in food prices in two years, ONS figures show.

January U.K. inflation held steady at 4% year-on-year benefitting from easing prices for furniture and household goods, food and non-alcoholic beverages.

According to the latest figures from the Office for National Statistics (ONS), prices for food and non-alcoholic beverages fell on a monthly basis by 0.4%, marking the first decrease since September 2021.

The core CPI figure excluding volatile food, energy, alcohol and tobacco prices annual reading was 5.1%, below the 5.2% estimate – but only a micro 0.1% difference.

The latest inflation data is a reflection of what is happening in the labour market: a tight labour supply is sustaining high wage growth and thus underlying inflationary pressure.

Inflation still sits double the BoE target of 2%.

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U.S. inflation ticks back up to 3.1%

Chart

Stocks dropped on Tuesday 13th February 2024 after hotter-than-expected inflation data for January caused Treasury yields to spike

The new inflation figure raised doubts that the Federal Reserve would be able to cut rates several times this year, a key part of the equity market bull run case.

The consumer price index rose 0.3% in January 2024 from December 2023. CPI was up 3.1% year-to-year. Economists expected CPI to have increased by 0.2% month over month in January and 2.9% from a year earlier.

U.S. inflation ticks back up in January 2024 figures
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Turkey’s inflation nears 65%

Inflation climbs

In January 2024, inflation logged its biggest monthly jump since August with a 6.7% rise from December 2023.

Year-on-year inflation hit nearly 65%, according to the Turkish Central Bank’s figures released Monday 5th January 2024

The consumer price index (CPI) for the country of 85 million people increased by 64.86% annually, up slightly from the 64.77% of December.

Sectors with the largest monthly price rises were health at 17.7%, hotels, cafes and restaurants at 12%, and miscellaneous goods and services at just over 10%. Clothing and footwear were the only sectors showing a monthly price decrease, with -1.61%.

Food, beverages and tobacco, as well as transportation, all increased between roughly 5% and 7% month-on-month, while housing was up 7.4% since December 2024.

Interest rate hike to 45%, see report here.

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U.S. Federal Reserve Bank holds interest rates at 5.25% – 5.50% and indicates reluctance to cut just yet

U.S. interest rate

The Federal Open Market Committee (FOMC) held interest rates steady and indicated a willingness stop raising interest rates.

But a cut anytime soon is unlikely until inflation is brought fully under control and nearer to the Fed’s 2% inflation target.

The Federal Reserve sent a signal that it is finished with raising interest rates but made it clear that it is not ready to start cutting, just yet. It also said there are no plans yet to cut rates with inflation still running above the central bank’s target.

Federal Reserve interest targets and increases since 2022 to January 2024

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U.S. inflation pullback

U.S. Inflation down

Progress on U.S. inflation

Core prices for personal consumption expenditures (PCE), a preferred measure by the Federal Reserve as a longer-term inflation calculation, rose 2% for the period, while the rate was 1.7%.

On an annual basis, the PCE price index rose 2.7%, down from 5.9% a year ago, while the core figure excluding food and energy posted a 3.2% increase annually, compared with 5.1%.

Good news

Inflation falling, GDP rising, stabilizing interest rates and no recession thus far the U.S. economy is looking rock-solid despite all the negativity.

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Turkey hikes interest rate to 45% after inflation touches 65%

Turkey inflation high

Turkey’s central bank on Thursday 25th January 2024 hiked its key interest rate to 45%.

It comes amid an ongoing struggle against double-digit inflation for Turkey’s policymakers, with the rate hike the latest step in that ongoing fight.

30 Turkish Lira to 1 U.S. dollar

Inflation in Turkey increased nearly 65% year-on-year in December 2023, up from 62% in November, and the country’s currency, the lira, hit a new record low against the U.S. dollar earlier in January 2024 at 30 Lira to $1.

Analysts predict this will be the last hike for some time, especially with local elections approaching in March 2024

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UK inflation ticks up slightly in January 2024

Beer inflation

Inflation, rose marginally to 4% in December, up from 3.9% in November 2023.

Economists had forecast a slight fall but unexpected rises in alcohol and tobacco prices were behind the surprise rise.

However, with energy bills predicted to come down in 2024, there are still expectations of interest rate cuts later this year.

On target still for 2%?

As we have seen in the Germany, the U.S., and France, inflation does not fall in a straight line, ‘but our plan is working and we should stick to it,‘ Jeremy Hunt reportedly said in a statement.

UK inflation from April 2019 to December 2023

UK inflation from April 2019 to December 2023

Unprepared for both the start and the end of the pandemic

Increases in the cost of energy and food costs, started by pandemic lockdowns ending exasperated further by Russia’s invasion of Ukraine and more recently the conflict in Israel have put household finances under extreme pressure.

The UK and other countries were woefully underprepared for all of these events as they ‘began’ and at the ‘end’. We did not prepare to come out of them – there was no exit plan!

Markets and traders are still expecting BoE to cut its base rate in 2024 due to the fast-falling inflation rate. It peaked at 11.1% in October 2022 – and now sits at 4%.

The question is: will the economic recovery be good enough to allow the Bank of England to start cutting rates?

The UK interest rate currently sits at 5.25%.

Beer inflation
‘What’s inflation?’ ‘Dunno, but my beer’s gone up!’
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December 2023 U.S. inflation data came in higher-than-expected

U.S. December inflation

Stocks moved lower Thursday 11th January 2024, reflecting the higher-than-expected December 2023 inflation data.

The S&P 500 in early trade edged lower by around 0.7%, while the Nasdaq Composite dropped nearly 0.8%. The Dow Jones Industrial Average dropped by 0.6%. The S&P 500 briefly touched 4800 after climbing above its record high of 4,796.

Higher than expected

December’s consumer price index figure came out slightly higher-than-expected, reflecting a 0.3% increase in consumer prices for the month, pushing the annual rate to 3.4%.

Core CPI, excluding volatile food and energy prices, came out in line with expectations, however, pointing to persistent, but easing inflation pressures. The new inflation data figures suggests that future interest rate cuts may be slower to come.

This move up in CPI is an absolute reminder of the unpredictable nature of economic recovery.

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UK inflation down again

THERE ARE TWO I'S IN INFLATION!

UK inflation fell by more than expected in November 2023, driven largely by a drop in fuel prices.

Inflation dropped to 3.9% in the year to November 2023, down from 4.6% in October 2023. Other than fuel, slowing food and household items were also behind the drop.

Inflation has fallen a long way from its peak in 2022, it is still almost double the Bank of England’s 2% target.

The Bank has put up interest rates 14 times since December 2021 to try to slow price rises, pushing up savings rates but also borrowing costs.

The Bank of England Interest rate is currently at 5.25%, a 15-year high.

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U.S. inflation at 3.1% November 2023

U.S. Inflation

Prices across a wide spectrum of goods and services moved slightly higher in November 2023 but were mostly in line with expectations, thus further easing pressure on the Federal Reserve.

The consumer price index, a closely watched inflation gauge, increased 0.1% in November, and was up 3.1% from a year ago, the U.S. Bureau of Labor Statistics reported Tuesday 12th December 2023.

While the monthly rate indicated a pickup from the flat CPI reading in October 2023, the annual rate showed another decline after hitting 3.2% a month earlier.

U.S. Bureau of Labour Statistics

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Euro zone inflation drops to 2.4%, well below expectations – bringing early Christmas cheer

Cheers

Annual inflation in the euro zone sank to 2.4% in November 2023 from 2.9% in October 2023, data showed Thursday 30th November 2023.

Core inflation was also below expectations at 3.6%.

The European Central Bank has stressed that it is too early to declare victory in the 20-member euro zone bloc, as they monitor potential pressures from wage increases and energy markets.

Headline inflation has now fallen significantly from the peak levels of 10.6% in October 2022.

Target of 2% and is well within reach.

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Bank of England governor worried over UK growth outlook

Central Banks are struggling to catch-up with inflation

The governor of the Bank of England, Andrew Bailey has raised concerns over economic growth as he warned again that interest rates will not be cut in the ‘foreseeable future’.

The bank boss said he was concerned over the UK economy’s potential to grow. It comes after the government’s forecaster cut its growth outlook for the UK, due to high inflation, interest rates, energy and food price increases which were exacerbated by the Covid pandemic and Russia’s invasion of Ukraine.

Inflation, which is the rate consumer prices rise at, has dropped sharply in recent months, falling to 4.6% in the year to October largely as a result of lower energy prices.

However, it is still more than double the Bank of England’s 2% target and Mr Bailey warned lowering inflation further would be ‘hard work’.

Interest rates are currently at 5.25%, a 15-year high, which has pushed up borrowing and mortgage costs.

The Bank of England (BoE) failed abysmally to maintain inflation at 2%.

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Fed minutes show no indication of U.S. rate cuts at last meeting

U.S. interest rate

Federal Reserve members, in their most recent meeting, gave little indication of cutting interest rates anytime soon, particularly as inflation remains well above their goal of 2%, according to minutes released Tuesday 21st November 2023. 

The detail of the meeting held 31st October – 1st November 2023, showed that Federal Open Market Committee (FOMC) members are still concerned that inflation could be stubborn or move higher, and that more may need to be done.

They indicated that policy would need to stay ‘restrictive’ at the very least, inflation is on a convincing move back to the central bank’s 2% goal.

Fed next meet 13th December 2023.

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UK inflation falls sharply to 4.6% October 2023

UK inflation drops

UK inflation fell to 4.6% in October 2023, down from 6.7% in September 2023. 

This is the lowest rate of price increases since 2021 and the bigger than expected fall should provide some relief to UK households gripped by the cost-of-living crisis. 

The main factors that contributed to the drop in inflation were largely due to lower energy prices, food and non-alcoholic drink prices, and airfares. Economists suggested that the main reason inflation fell from its peak of 11.1% in October 2022 was due to the fall in the energy price cap, which limits what suppliers can charge consumers per unit of energy.

Office for National Statistics Data (ONS)

Office for National Statistics Data

However, the UK still has the highest inflation rate of any G7 country, and some economists warn that the Bank of England (BoE) may need to raise interest rates to prevent inflation from rising again.

Target hit

The UK government will no doubt rejoice today as the end-of-year 5% has been achieved earlier than expected. But don’t party too early, the actual target is 2%. There is a limit to how much credit ministers can take for the fall as energy prices settle.

The FTSE100 was happy, it climbed some 100 points in morning trade.

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UK pay outstrips inflation by highest amount for two years

UK pay up

Pay growth has outstripped inflation by the most since 2021, in a further sign that the pressure on living costs may be starting to ease.

Regular pay rose at an annual rate of 7.7% between July and September 2023, official figures show; higher than average inflation over the same three months.

But job vacancies fell for the 16th month in row, in a worrying sign that the jobs market is weakening. Between August and October 2023, the estimated number of vacancies in the UK fell to 957000, down 58000 – although the Office for National Statistics (ONS) said the total remains well above pre-pandemic levels.

Data Source: Office for National Statistics Data

UK pay outstrips inflation by highest amount for two years

The UK’s unemployment rate was largely unchanged between July to September 2023 at 4.2%, according to ONS data.

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UK economy flatlines

UK flatlined

The U.K. economy flatlined in the third quarter, initial figures showed Friday 10th November 2023.

Gross domestic product (GDP) showed zero quarterly growth in the three months to the end of September 2023, following an increase of 0.2% in the previous quarter. In annual terms, the UK’s Q3 GDP was 0.6% higher than in the same period in 2022.

Services sector output dropped 0.1% on the quarter, but the decline was offset by a 0.1% increase in construction performance, while the production sector flatlined.

U.K. Chancellor of the Exchequer Jeremy Hunt said high inflation remains the ‘single greatest barrier to economic growth’ in the country, with the consumer price index remaining at 6.7% year-on-year in September 2023.

UK economy flatlines as inflation sticks at 6.7% year-on-year as at September 2023.

‘The best way to sustainably grow our economy right now is to stick to our plan and knock inflation on its head’, Hunt reportedly said.

It’s useful to know the government have a plan, even though they were very late to the inflation party! Guess they were sidetracked with all the other parties at No.10!

‘The Autumn Statement will focus on how we get the economy growing healthily again by unlocking investment, getting people back into work and reforming our public services so we can deliver the growth our country needs’.

Up until September 2023, the Bank of England (BoE) raised interest rates 14 consecutive times to try to influence the UK ‘product and service’ price climb.

Red flags

Interest rates are now at a 15-year high of 5.25%, and are expected to remain high for some time to come. Bank Governor Andrew Bailey reportedly said last week it was ‘much too early’ to be considering rate cuts.

Thank you Governor Baily – it so comforting and reassuring to know that the very people who missed the red inflation flags are still in charge of policy.

Transitory?

Remember, the BoE and others originally suggested inflation would be transitory – I suppose it is, if given years to move back down. What did you think was going to happen after all that borrowing and the country crawling back to work after the pandemic.

Nice job guys! Don’t forget to collect your paycheque on the way out!

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The Fed is ‘not confident’ according to Jerome Powell

Fed

Fed Chair Jerome Powell reportedly said he and his colleagues remain steadfast in getting policy in line with their 2% inflation target, but ‘we are not confident that we have achieved such a stance’.

He stressed the Fed nevertheless can be cautious as the risks between doing too much and too little have come into closer balance.

Federal Reserve Chairman Jerome Powell reportedly said Thursday 9th November 2023 that he and his fellow policymakers are encouraged by the slowing pace of inflation but are unsure whether they’ve done enough to keep the momentum going.

Inflation battle

Speaking a little more than a week after the central bank voted to hold rates steady, Powell said in remarks aimed at the International Monetary Fund (IMF) gathering in Washington, D.C., that more work could be ahead in the battle against high prices.

The statement comes with inflation still well above the Fed’s long-standing goal but also considerably below its peak levels in the first half of 2022. After 11 U.S. rate hikes, we have witnessed the most aggressive policy tightening since the early 1980s, the FOMC have increased rates from pretty much zero to a range of 5.25%-5.5%.

Those increases have coincided with the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, to fall to an annual rate of 3.7%, from 5.3% in February 2022. The more widely followed consumer price index peaked above 9% in June of last year.

Progress

Powell referenced the progress the economy has made. Gross domestic product (GDP) accelerated at a ‘quite strong’ 4.9% annualised pace Q3 2023, though Powell also said the expectation is for growth to ‘moderate in coming quarters’. He described the economy as ‘just remarkable’ in 2023 in the face of a broad expectation that a recession was inevitable.

Nothing like a massive ‘self-pat’ on the back for a job well-done? Remember the Fed’s initial analysis? IT was for inflation to be ‘transitory’. They didn’t get that right either.

Futures pricing, according to the CME Group, suggested there’s less than a 10% chance that the FOMC will approve a final rate hike at its Dec. 12-13, 2023, meeting, even though committee members in September pencilled in an additional 0.25% rise before the end of 2023.

Impression drawing of Fed Chair. The Fed is ‘not confident’ according to Jerome Powell.

Traders anticipate the Fed will start cutting rates next year, probably around June 2024.