28 June 2023: Dhingra sees “glint of light” in fight against inflation

Backbench members of the ruling Conservative Party are very used to trying to find a scapegoat to deflect the blame for their often-poor performance.

This was particularly clear during the Pandemic, and it is happening again as the economy stumbles along. It is more due to luck than judgment that the country looks likely to just about avoid falling into recession.

The scapegoat this time around is Bank of England Governor, Andrew Bailey, who is a solid technocrat who lacks the charisma of his predecessor, Canadian, Mark Carney.

Carney was struck in the mould of earlier Chairmen of the Federal Reserve and commanded the respect of politicians and businesspeople alike, while Bailey appears to be a little “lightweight” for the role.

Therefore, he appears to be an easy target to blame for the current cost of living crisis and is facing pressure to resign from the aforementioned MPs.

He has been variously described as being “asleep at the wheel” or having “bungled” the tightening of monetary policy, while former minister, Jacob Rees-Mogg has called him the “Ostrich in Chief” for always appearing to have his head in the sand while calling for him to be replaced.

A group of senior executives from the main UK supermarkets were summoned to Parliament yesterday to face the finance select committee and answer charges that they are currently protecting their bottom lines by “dragging their feet” in passing on falling wholesale prices for essentials to their customers.

Representatives from Tesco, Asda, and Sainsbury appeared decidedly uncomfortable as they were asked to justify their profit margins and the amount of profit they have made over the past year or so.

Swati Dhingra, a relatively new member of the MPC and one of the two who voted to raise the base rate of interest by twenty-five basis points, spoke yesterday of her hope that there is some light at the end of the tunnel as wages are beginning to react to the lag in the effectiveness of higher rates.

She believes that core inflation alone is not an exact measure of domestically generated inflation, while medium-term forecasts are not good at picking up inflection points. She believes that the lack of progress in bringing down headline inflation cannot be solely blamed on what she called “greedflation”, a clear reference to accusations of profiteering by supermarkets.

The pound found some support around the 1.2700 level yesterday, climbing to a high of 1.2759 and closing at 1.2749.

The Bank of England quarterly report will be published later today, and the Governor will no doubt have to again deflect questions about his own future as he makes a speech on the economy at lunchtime.

The rise in interest rates should handle a “reset” in the housing market, which should be a further drag on inflation according to Fed Chairman Jerome Powell.

The price of homes, whether new builds or existing properties, is such a driver of prices in several sectors of the economy that rivals employment in the overall rise in prices across the country,

He believes that it is impossible to “tailor” monetary policy to suit one sector and yet leave another “unscathed”. That is the nature of monetary policy, since it is something of a “blunt instrument”.

Powell also spoke yesterday of the fear of profiteering across the entire retail sector, preferring to blame the lag between producer prices and retail prices as the reason that retail prices are not falling as fast as he and his colleagues would like.

That, he said, was one reason the FOMC had agreed to skip a rate increase at its latest meeting.

It is highly likely that rates will again be increased at the next meeting of the FOMC, which takes place on 25/26 July.

By that time, not only will the June employment report have been fully “picked apart”, but the June inflation data will also have been released.

Powell maintains that he was fully “on board” with the pause in rate increases despite rumours that the vote was a “close run thing”.

No other members of the FOMC are calling the pause anything other than a “skip” to allow the economy, inflation and interest rates to become better aligned.

Data released yesterday showed that consumer confidence was at its highest level for eighteen months in May. The rise was mostly attributed to the continued buoyancy of the employment market, which continues to have more than 200k new jobs per month.

Current conditions are still far stronger than economists have predicted, while the six-month outlook rose from 71.5 to 79.3.

One further reason for this leap forward in confidence is that all talk of a coming recession has completely disappeared.

The dollar index was again unable to consolidate recent gains as risk appetite returned. It fell to a low of 102.31 and closed at 102.50.

Christine Lagarde, the President of the European Central Bank, reiterated her recent comments about how “sticky” core inflation had become, and how this was going to lead to yet another rate increase at the July meeting of the Governing Council.

While she has the support of the German, Austrian, Dutch and Belgian Central Bank Governors, Lagarde will continent oi have apparently no issue with overstepping her mandate, especially since she has a vote on rate increases and is not, as many believe, expected to be neutral, allowing member central banks to agree on interest rates according to their own country’s needs.

The current system, as with many other areas of the administration of the Eurozone, needs significant adjustment, but the region appears to lurch from crisis to crisis without either the time or inclination for change.

Ask any man in the street in Paris, Madrid or Zagreb, what the function of the seven-hundred-and-fifty-member European Parliament is, and they will find it tough to answer.

In other nations of the G7, including those like Germany, Italy and France who are also Eurozone member’s decisions on the economy are discussed in the various parliaments, but in the Eurozone, the “buck” appears to stop at the desk of the Central Bank’s President.

It is hard to imagine that questions have not been asked in the twenty individual parliaments of the eurozone about monetary policy and whether it is better to suffer a rate of inflation that is above the arbitrary target of 2% or to fall into recession.

No matter the rights and wrongs of Brexit and the motives behind it, the sovereignty of the UK parliament and overarching control over the economy of the country is a good enough reason for leaving the community.

In her speech yesterday, Lagarde reiterated that the ECB won’t be in a position to declare victory over inflation for some time to come.

She repeated that the Central Bank is likely to raise rates at its July meeting. Unless there is an unexpected fall in inflation there will be a further hike in September, although given the “gap” between the July and September meetings, it will still be the data that is the ultimate arbiter of monetary policy.

That last point is a reference to her Chief Economist’s view that it is too soon to guess what actions will be taken at the end of the next quarter.

The Euro rose to a high of 1.0976 and closed at 1.0960 yesterday, as it again looks likely to threaten the psychologically important level of 1.10. The main question now is: “Can it remain above 1.10, for more than a few sessions?”

Have a great day!