28 June 2022: Inflation at 11% soon, when will it fall

GBP – What kind of winter can we expect with high inflation

The rather unedifying sight of Criminal Barristers taking strike action in support of a pay-claim illustrates perfectly the pace at which inflation has risen and how wages have been left behind.

It is becoming clearer every day that the UK is becoming stuck in a vicious circle of rising inflation being chased by rising wages. Once this becomes embedded in a society, it becomes difficult, almost impossible to turn around.

Every day recently, newspaper headlines have shouted about another sector of the economy taking action to try to not only catch up, but try to get ahead of raging inflation.

There is an entire generation that has never experienced prices rising at such a rate. Even those who lived through the 1970s are surprised how visible rising prices in shops are. Everyday items, bought regularly, are seeing prices increase at every visit to the supermarket.

The most significant difference which was touched upon yesterday is the fact that the labour market is tight and getting tighter. Having said that, while Brexit is not the most significant contributor to the slowing economy, it clearly is having an effect on the labour market.

In several sectors where workers from the EU took up the slack, particularly in seasonal sectors, staff shortages are common. Hospitality, farming and commercial cleaning are three sectors where the shortage of staff has become critical.

In some areas of the country, farmers are being forced to plough vegetable crops back into the soil because there aren’t enough pickers available. This was a lucrative and vital role for EU workers pre-Brexit.

GDP data for Q1 will be released later in the week, with the economy expected to have grown by just 0.8% between January and March.

Since that is the only important piece of data expected, the focus will remain on the Bank of England with both Jon Cunliffe and Andrew Bailey making speeches that will be picked apart for any clue as to the intentions of the MPC, although they will not hold a meeting in July.

Yesterday, Sterling saw some selling pressure, but remained within its recent range. It fell to a low of 1.2237, closing a little lower on the day at 1.2266.

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USD – If there’s to be a recession, will the public even notice?

The American man in the street appears to be getting on with life, grateful that the level of Federal interference in his life has waned considerably since the end of the Pandemic.

American citizens react badly to being told what to do by their Government and reacted badly, evoking protests, to being told to stay home as Coronavirus raged.

Now they are happy to visit shops again, get outside and meet friends. They are obviously noticing shortages of several big-ticket items where the interruption of supply chains has had a significant effect, and price rises in everyday items, especially fuel. The relationship between drivers and the cost of gasoline is very close.

However, begin a conversation about inflation and how high it could go, and the lack of interest is palatable. There is no confusion regarding how certain a recession is or whether the economy is stagnating. That is left to the money men on Wall Street to worry about.

The latest forecast for the economy is that the risk of inflation remaining high compared to a recession is about fifty-fifty.

There are those who see a recession as certain, based on the actions of the FOMC, while those same actions are expected to finally get a grip on demand, and therefore price rises in the short, or at worst medium term.

Data for durable goods orders was released yesterday. While orders from large items such as planes, ships and industrial machinery weren’t spectacular, they at least showed that there is growth.

Orders rose by 0.7%. That is compared to a rise of 0.4% in April and a market expectation of 0.1%.

Tomorrow, Personal Consumption Expenditure data will be released. This is Jerome Powell’s favoured method of calculating inflation, since it is far more broadly based than CPI.

Powell is speaking again tomorrow. Unless he changes his rhetoric considerably, the markets are well aware of his continued hawkish stance on inflation.

Yesterday, the dollar index saw a degree of support at lower levels, but is, for now, unable to break above previous highs. It reached a low of 103.67, closing at 103.95.

EUR – Can Lagarde and von der Leyen push through reforms?

One way of looking at the tools that the ECB has introduced, or reintroduced, to counter fragmentation of the region’s Capital Markets is to see that the Central bank has admitted defeat.

It was fairly obvious that a market that has been spoon-fed a diet of bonds that were either carrying the implicit guarantee of the ECB, or were being snapped up to be held in portfolio by the Central bank itself, would not be willing to pay the same price when that competition or guarantee was removed.

Going forward, the only counter measure that Christine Lagarde and her colleagues can conjure up is to return to the days of PEPP, having only just removed it.

The Bond Market won’t particularly care that the ECB only plans to reinvest the proceeds of maturing bonds back where they came from. Traders now are fully aware that the Eurozone will have to become almost totally reliant upon the stronger nations if monetary union is to survive.

The EU President in concert with the ECB President are going to have some difficult, possibly impossible decisions to make if they are to rescue the Eurozone from yet another financial crisis.

Draghi has retreated behind his national border, Merkel has vanished having been behind the poor decision to appoint Lagarde as a compromise candidate instead of Weidmann, in order to get von der Leyen elected.

Macron has been severely weakened in his ability to self-promote himself to a more prominent role in Brussels by his disastrous showing in the recent French election, while the new German Chancellor appears to want to remain in the shadows.

The entire region appears to be leaderless and rudderless, and now has the conflict in Ukraine and the coming energy crisis to contend with. It may be that Vladimir Putin has sensed this and has stepped up attacks on Kyiv in particular accordingly.

The euro appears to have begun the summer lull early, in combination with other G7 currencies. It managed to rally above 1.06 versus the dollar yesterday, but there was very little follow through. Having reached 1.0614, it fell back to close at 1.0585.