UK inflation last week came back to the BoE’s target for the first time since 2009. This should most certainly be a boon for consumers whose average real incomes have been negative for several years. However, our UK Future Inflation…
There are some notable reasons for near-term reasons for optimism in the UK. The housing market seems to be picking up, industrial production growth is looking up together with PMI data and the equity market has done well. All these are real and significant signs of a better economy in the UK, but the structural challenges remain.
No-one ever said that investing was easy, but when textbook correlations start to break down it can be outright painful. Such of course has been the environment in recent couple of months with stocks and bonds falling in unison. It won’t last forever, but it may persist for a while longer.
The underlying outlook for inflation in the US continues to point to upside risks in the coming years. Endless discussions between hyperinflationists and deflationists are boring and unproductive. We prefer to look at the data and the data is pretty clear.
The aggregate real global policy rate is still firmly negative due to the commitment to low interest rates in the major G4 economies, but we are seeing notable divergence between economies. The UK remains a textbook example of stagflation while real rates also differ markedly between emerging economies.
The US CPI is currently just above target at 2.3%, and long-term market expectations of inflation measured by the US inflation swap curve remains mid-range. This is in stark contrast to all-time lows in nominal treasury yields which appear to be pricing in almost the end of the world.
The strength of sterling has been in part due to some safe-haven flows from the Middle East (where sometimes GBP is seen as a preferable safe-haven to the USD or CHF), but this is not the fundamental driver.
UK inflation has been falling, driven mainly by a fall in consumer demand, and last year’s VAT increase falling out of the year-on-year comparisons. Looking under the bonnet, however, reveals a disconnect between inflation of ‘necessary’ and ‘discretionary’ goods.