18 August 2023: No one feels “better off” despite falling inflation

England’s qualification for the women’s world cup final which will take place in Sydney on Sunday is expected to provide a £185 million boost to the economy. At the current time when the economy is teetering between positive and negative GDP results, such an event could further disguise the underlying weakness in the economy.

To see significant growth in the coming months, the government and Bank of England will need to come together to provide the stimulus to see GDP return to trend.

There are two actions which may trigger this. The first would be when Andrew Bailey announces when the MPC considers it to be time to stop the cycle of interest rate hikes. Given this week’s inflation data that may come sooner than had been expected, but there is still a hawkish undercurrent to the committee’s thinking which may see rate hikes continue until the end of the year.

After the meeting which will take place on September 21st, there will be only two further meetings this year.

The other action may come in the Chancellor’s autumn statement which will take place in November. Despite having constantly said that it is too soon for a reduction of taxes in the UK, it is becoming more and more likely that Jeremy Hunt will decide to use the “nuclear option” since his Party is trailing so far behind in the opinion polls that if they don’t take drastic action they will be sent into opposition sometime in the second half of next year for the first time in fourteen years.

The latest revenue figures published by the treasury appear to make tax cuts more affordable than Hunt had previously considered.

The number of people in employment, coupled with the salary increases that have taken place, especially in the private sector coupled with the freezing of National Insurance thresholds have provided an unexpected windfall to the Treasury that had not been expected.

Although inflation remains high and the wage increases will likely see State Pensions and other benefits rise by close to 10% for the second consecutive year, there is likely to still be enough surplus cash to at least to begin to see taxes begin to fall with a further cut taking place in the Budget next Spring.

Yesterday, the pound saw further volatility driven by data releases on both sides of the Atlantic. It fell initially to a low of 1.2702 before buyers came in to push it up to a high of 1.2786 before it settled back to close at 1.2747.

The next edition of the Jackson Hole Economic Symposium will begin next Thursday, hosted by the Federal Reserve.

It is likely that no matter the topic on the programme the conversations will be dominated by two matters: changes to monetary policy and the prospects for global growth in 2024.

Making the keynote address, Jerome Powell may provide some insight into the thinking of the Federal Reserve while Christine Lagarde will also be attending and will no doubt be quizzed about the September ECB meeting.

At last year’s gathering, Powell spoke of the undoubted pain to come as the Fed had just started its cycle of rate hikes. He promised some proactivity and “data dependency” which took another year to come about.

Last year, he promised higher interest rates slowing growth, a moderation in job creation (which also took a year to achieve) and a degree of pain for households and businesses.

While he is unlikely to be in party mood, he is entitled to say that the next year is expected to see interest rates begin to fall, inflation to return close to the Central Bank’s 2% target and, his ace card, no recession.

He may provide a subtle hint that a further pause will be agreed at the FOMC’s September meeting but will also retain the option for another hike going forward.

2024 is expected to be an entirely different year. While a recession remains little more than a dark cloud on the horizon its change into anything more is fading by the week.

With another set of jobs numbers as well as inflation data to be released prior to the next FOMC meeting, Powell and his colleagues will definitely be able to say that they have been “driven by the data.”

If the numbers remain constant, inflation will be even closer to the target, while job creation will have cooled even further. Despite this, Powell will avoid announcing his “soft landing” since he remains a conservative at heart.

The dollar index tried to break higher into recently unseen territory yesterday. It climbed to a high of 103.59 but ran into significant selling pressure, falling back to a low of 103.05 before closing at 103.42.

With Christine Lagarde expected to reappear at next week’s Jackson Hole Symposium, her colleagues on the Governing Council are beginning to return from their summer holidays to face questions about the next rate setting meeting.

Martins Kazaks, the head of the head of the Latvian Central Bank was the first to face the inevitable barrage of questions from financial journalists who have been starved of their usual quota of “quotable quotes.”

Kazaks believes that interest rates are at their peak and only need a “minor tweak,” so any further rate hikes will be “really very small.”

The ECB has raised interest rates at nine consecutive meetings, but a tenth could be a “bridge too far.”

Data released by Italy this week showed that its economy contracted by 0.3% in the second quarter and now looks certain to join Germany in recession.

The Italian Finance Minister and Central Bank Head are likely to join Prime Minister Giorgia Meloni in calling for rate hikes to end. Italy is expected to be a prime mover in a bid to have the Governing Council vote on a plan originally put forward by the Governor of the Banque de France to call an immediate halt to rate increases but agree that rates will remain “higher for longer.”

With the economic data released this week for the entire Eurozone showing a marked improvement, there will still be nations, like Italy, which are struggling with the level of interest rates which they believe are inflicting damage on their economy. A more introspective look at their economy may show that a cut in the level of social spending may reap some benefit.

It will be interesting to hear what Lagarde has to say next week when she speaks in Wyoming. It is likely that her comments will set the tone for the run-up to the ECB meeting, but it is doubtful if she will be as hawkish as she has been before previous meetings.

Yesterday, the Euro managed to find a foothold close to its recent low and managed to rally to a high of 1.0918. Sell orders placed before short-term resistance at 1.0920 saw it fall back to close at 1.0872.

Have a great day!