15 February 2024: Food prices fell in January for the first time in 2 ½ years

The rate of inflation was unchanged in January, as a rise in energy costs was offset by the first fall in overall food prices in two and a half years.

While energy prices continue to fluctuate, driven by geopolitical events, a fall in food prices is seen as a genuine signal that inflation may be beginning to subside.

There is a growing view that the issues surrounding Brexit may be the most significant factor in the Bank of England’s seeming inability to drive inflation down to its 2% target.

Politically, it is unthinkable that in an election year, the Treasury would accede to any question of raising the target since it would open it up to charges of moving the goalposts to satisfy its own policy choices.

Although the Budget is around three weeks away, rumours are beginning to circulate that Jeremy Hunt is considering further cuts to public services to fund far larger cuts in taxes than were previously being considered.

It would mark a return to traditional Conservative values that have been disregarded by earlier Prime Ministers and Chancellors.

Ironically, political commentators have long been saying that the only way the Conservative Party could win the next election was for the Labour Party to “shoot itself in the foot”.

Such a set of circumstances are beginning to occur, as Labour’s age-old issue of anti-Semitism has resurfaced. Although Sir Keir Starmer, promised to “root out” deeply held prejudices when he took over from Jeremy Corbyn as leader, he appears to have driven them deeper below the surface, only to reappear at a most inopportune time for Labour’s chances of victory.

Andrew Bailey appeared before the House of Lords Economic Affairs Committee yesterday and told the Upper House that a recession is in the balance. With the economy having contracted by the smallest possible margin in the third quarter, and the data for the fourth quarter due for release later this morning, it is entirely possible that the economy again contracted by a similar margin.

While two consecutive quarters of 0.1% contractions will confirm a “technical” recession, it is well within the margin for error given the number of “moving parts” that make up the data.

It is the optics of a recession that will concern Rishi Sunak the most. Even as he says that the country has “turned a corner” since the start of the year, a recession is never a good look.

The pound again threatened the medium support at 1.2540 yesterday. It fell to a low of 1,2535 but recovered to close at 1.2563.

Although the economy has exhibited “stellar” levels of growth and activity in the past two quarters, the housing market is still in the doldrums across the board.

While prices for new homes, either new builds or existing dwellings are showing below-average increases, the “bottom has fallen out” of the rental market with record numbers of evictions taking place.

This issue is firmly rooted in the current relatively high level of interest rates, which typically have a “knock-on effect” on the sector of the population least able to support itself.

A recent study by Harvard University showed that more than half of all renters are paying more than thirty per cent of their income on rent. Add to that the growing shortage of affordable homes nationwide and there may well be a crisis brewing, particularly when the costs of food, childcare and energy are considered.

There are several contradictions in play within the headline of a strong economy. For example, it is hard to compare the historic low levels of unemployment that have been in place despite high-interest rates, yet the nation also has the highest level of credit card debt. That should only happen when the “middle class” is “struggling to make ends meet”.

It may have something to do with the fact that the nation’s top one percent has more money than the entire middle class.

Unaffordable rent is a throwback to the policies of Ronald Reagan, which saw a significant redistribution of wealth.

While the data says one thing about the economy, the situation “on the ground” says something entirely different”. Neither Party in the upcoming Presidential Election has policies that will ease this seeming injustice, as both sides are content to see record levels of job creation and an economy that is growing at a healthy rate.

The dollar index continues to make ground as any rate cut appears to have been “pushed further down the road”, given the latest inflation data.

The Greenback rose to a high of 104.97 but ran into selling pressure which drove it back to close at 104.72.

It appears that even the moderates on the ECB’s Governing Council are unable to reach agreement on the need for a cut in interest rates to re-invigorate the Eurozone economy.

Yesterday, the ECB’s Vice President, Luis de Guindos, spoke of his belief that the Central Bank needs more time to evaluate the risks inherent in cutting interest rates too soon.

His comments reinforce the way the ECB is looking at the risks that are present in the economy. It is far more concerned that inflation may reignite than it is about driving the economy into a deep recession.

One of de Guindos’ colleagues on the Governing Council, Gabriel Makhlouf, gave a typical middle-of-the-road speech yesterday in which he said that he is open-minded about when interest rates should be cut.

It should be noted that his open-mindedness is not mistaken for ambivalence, since he believes that should inflation continue its current trajectory, cut(s) in interest rates should follow.

The Eurozone is in danger of falling into a trap of its own making. There is still a nationalistic element to its deliberations that needs to be removed if the entire “experiment” is to succeed.

If one contrasts the ECB and FOMC, individual Eurozone Central Bankers and Regional Fed Presidents have a similar role. Yet FOMC members’ comments are relative to the economy as a whole and very rarely contain a regional element, while ECB Governing Council Members are all about what suits their nation.

Even Executive Board Members tend to promote what suits them. Isabel Schnabel is a classic example. She is a hawk on inflation in line with her home nation’s view but does not take into consideration the overall picture as some nations struggle to find any growth at all.

Even Philip Lane, the ECB’s Chief Economist, has “nailed his colours to the hawkish group’s mast”. In a speech this week, he spoke of the number of interest rate cuts being related to the fall in inflation. Until the collective fascination with inflation is removed, the Eurozone economy will continue to struggle.

The ECB does not have a clear mandate such as the FOMC, since the ECB’s mandate appears to be a moveable feast.

The euro lost ground against the dollar yesterday but managed to remain above the three-month low it made on Tuesday. It again fell to a low of 1.0694 but managed to recover to close at 1.0727.

Have a great day!