UK CPI inflation came in above market expectations at 1% vs 0.6%

  • 20th August 2020

The FOMC (Federal Reserve rate setting panel) minutes awoke markets from their slumber yesterday catalysing a small selloff in the last hour of US trading.

What has happened

The FOMC (Federal Reserve rate setting panel) minutes awoke markets from their slumber yesterday catalysing a small selloff in the last hour of US trading.

Fed Minutes

There were three things that markets were looking for in the minutes: a discussion on yield curve control (whether to try to control longer interest rates), signs of the outcome of the policy review (whether to adopt an average interest rate target) and any imminent signs of additional monetary accommodation. Whilst the policy review is expected to still be revealed in the ‘near future’, the market expects this to be in September, the minutes were mostly disappointing. Yield Curve Control was discussed with some resistance implying that there is no consensus position yet but also there was no near-term sign of a desire to extend the size or duration of asset purchases. The absence of discussion over accommodation but the prospect of average inflation targeting still being on the cards allowed the US dollar to break its weakening streak after several days.

UK Inflation Report

UK CPI inflation came in above market expectations at 1% vs 0.6%. There are reasons to be somewhat sceptical that this will continue however, with the headline rate impacted by a rise in fuel price inflation. Amongst the basket the clothing element also saw a rise, but this reflects the reopening of stores that initially resisted discounting but have now capitulated to the market pressures, likely heralding a reversal. On a slightly shorter-term note, the VAT cut for the hospitality sector and the August ‘Eat Out to Help Out’ scheme will have a strong deflationary pressure in the August figures. With the UK economy still weak, and the Q2 slump one of the largest within developed markets, we would not expect there to be sufficient demand to push inflation to a level that would be of concern to the Bank of England.

What does Brooks Macdonald think

One of the worst outcomes for an economy trying to recover is stagflation where stagnant growth is combined with inflation. Whilst we have fairly sober expectations over the UK GDP growth rate, we do believe that inflation will remain under control given weak consumer demand and the fact that yesterday’s higher figure reflected a bounce back in volatile components such as energy.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.