Ray of Hope on Inflation

MARKET HOPES LIFTED BY LOWER US INFLATION

Global equities have had another strong week buoyed by lower-than-expected US inflation. That boosted hopes US interest rates may not have much further to rise. The US dollar also slipped on the news but the response from the US bond market has been more cautious as longer dated yields seem set to end the week higher. Headline US CPI inflation was predicted to be down in July after the recent decline in the oil price. However, it fell by more than generally expected and the ‘core’ rate confounded expectations it would rise by holding at its June rate of 5.9%. That raised hopes that the global supply constraints that have lifted goods prices may now be easing. An unexpected fall in July US producer price data seemed to provide corroboration of this.

The coming week sees a host of US economic activity data that will provide further insights into current economic conditions and whether GDP is likely to rebound in the second half of 2022 after unexpectedly falling in the first two quarters. We expect mixed results with a rise in retail sales and industrial production but a further fall in housing activity.

UK INFLATION EXPECTED TO RISE AGAIN

It is a particularly busy week ahead for UK economic data. The number one focus is likely to be Wednesday’s July inflation update. In contrast to the US, it is expected to show a further rise. We expect annual headline CPI inflation to move up to 9.8% from 9.4% in June, a new 40-year high. We also predict the ‘core’ rate (excluding energy & prices) to rise to 6%, from 5.8% in June. That move may add to concerns that the rise in prices is becoming broader based. Nevertheless, it would still leave core inflation below its April peak of 6.2%. UK inflation seems set to rise significantly further in October. The BoE calculates that it could move above 13% when the next Ofgem price cap comes into effect.

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