6 November 2024: Inflation is falling faster than expected

Too close to call is the watchword this week.

It certainly applies to the U.S. election, but in the UK, the Bank of England’s Monetary Policy Committee will also struggle to make a definitive decision on whether to cut Its base rate of interest this week,

Having said following the last MPC meeting that the Bank would become more aggressive in cutting rates as long as rates remain under control, Andrew Bailey is thought to have taken independent member, Catherine Mann’s words to heart when she spoke recently of the dangers of secondary inflation in the services sector which “still has a long way to go.”

He spoke recently of his heightened confidence, “I think the economy has come through the shocks of the last five years better than many of us feared. So, there is a base there to develop,” but he warned that the developing situation in the Middle East was a threat to economic stability in the UK.

The committee is stuck between wanting to act proactively and feeling the need to be reactive to the current situation.

None of the MPC members will want to vote for a rate cut only to face a tough decision on whether to reverse that decision early in the new year as prices rise again.

The Bank cut the base rate in August from 5.25% to 5%, in a narrow vote, reducing the rate from a 16-year-high.

The cut meant that millions of households on variable-rate mortgages saw a reduction in their bills.

The Financial Policy Committee estimated that 1.7 million homeowners benefited from reductions of around £120 per year.

Around a third, or three million borrowers, who are currently on fixed deals below 3%, will need to remortgage by the end of 2027, but given the government’s actions in trying to balance the books between borrowing and taxation, this seems a long way away.

On balance, the Bank of England’s Monetary Policy Committee (MPC) is expected to reduce the base rate by twenty-five basis points to 4.75% tomorrow, considering easing inflationary pressures.

Recent data shows UK inflation has dropped from 2.2% in August to 1.7% in September, prompting a shift from a restrictive monetary policy to one that supports economic growth.

The real economy is currently facing mixed signals.

The real economy is currently facing mixed signals. Core inflation fell from 3.6% in August to 3.2% in September year-over-year, and from 0.4 per cent to 0.1% month-on-month, indicating a broader moderation in price pressures.

However, stagnant wage growth continues to squeeze household budgets, potentially dampening consumer spending. While unemployment has slightly decreased from 4.1% to 4.0%, the tight labour market is showing signs of cooling, which could further justify a rate cut if it dampens consumer confidence.

The pound is being whipsawed by the prospects for the vote of the U.S. election. Yesterday, it rallied to a high of 1.3037, closing at 1.3027, but as early results from the U.S. have been published, it has reversed those gains and fallen so far to a low of 1.2890.

Every U.S. Presidential election throws up some strange results, as it becomes as much a battle of personalities as it does policies.

The candidates bandy around terms like “the left” or “liberal,” but at the end of the day the difference between Kamala Harris and Donald Trump, while not as close as the expected result, is not as wide as they would like people to believe.

Elon Musk has just posted on Twitter, “Game set and match.” The Trump campaign is feeling confident that they will win as supporters continue to wait for a final result.

It is just as buoyant in the Harris camp. Voting has just closed (4 am UK time), in California, a major Democrat stronghold, so with the vote at 227/165 in Trump’s favour that is likely to change in the next few hours.

Trump has one in several swing states.

The result in Georgia is often pivotal. It is a State that Biden one last time around. Trump has won it this time. However, the result in Arizona, another swing state, with a little more than half the votes counted, looks like being far closer than predicted.

The economy “only” added twelve thousand jobs in October. This was quickly seized upon by the Trump camp as a sign that the economy is teetering on the edge of a recession, although the truth will only be known in a month when the dust has, “hopefully,” settled on the election result.

The timing of the publication of the October Employment report may have had something to do with the dwindling number of jobs created, as did the two hurricanes which battered Florida during the month, as well as some industrial action.

Nonetheless, if the FOMC is going to be true to its word and be driven by the data, a rate cut when its decision is announced tomorrow evening (UK time) should be a foregone conclusion.

Jerome Powell will find himself on shaky ground should Trump win the election, but even so will remain faithful to his principles. He does not want the Fed to be seen to have started a cycle of rate cuts while he is concerned that inflation may still be an issue.

However, he can only play the cards he is dealt, and even though inflation, as depicted by the recent PCE data, is still “sticky” a twenty-five-point cut is expected to be agreed upon tomorrow.

The dollar has been just as volatile as expected throughout the past five trading sessions.

Yesterday, the index fell to a low of 103.38, but so far this morning it has skyrocketed to a high of 105.19, before settling back to its current level of around 104.66.

Germany is in a mess. Economically, socially, and politically it appears to be coming apart at the seams.

Bringing down the governing coalition may be the only way to revive Europe’s economic giant.

Last week, Christian Lindner, the country’s Finance Minister and Leader of the Free Democratic Party published a paper in which he provided a path to recovery.

Under Lindner’s plan, Net zero legislation would be watered down, welfare benefits would be reduced, and corporate taxation would be cut to unlock a fresh wave of investment and innovation.

However, the hapless Chancellor Olaf Scholz has presumptuously rejected it.

The result? The government may well fall and with the economy already on the brink, it will trigger a full-blown crisis.

The far right will be “licking its lips” at the thought of fresh elections, given how well they have done in state elections recently.

Scholz appears unable to unify the country in the way Angela Merkel did previously. She had the knack of making seemingly diverse ideologies pull together for the greater good of the nation.

Membership in the European Union was a boon for the country when it could bend Brussels to its will, but the election of Ursula von der Leyen as European Commission President, Christine Lagarde as ECB President and Scholz, has weakened the country’s leadership capabilities.

The war in Ukraine, the rise in the gas price and Russian determination to undermine the German economy have all played a part in the country’s near collapse.

The country may have dodged a recession in the third quarter, with GDP growing by a paltry 0.2% between July and September, but no one is fooled.

Ironically, an Italian, a man from a country long considered a basket case in Frankfurt, has provided a blueprint for the recovery of, not just Germany, but the entire Union.

Mario Draghi believes that a vast untapped potential for improving economic progress and social well-being across the EU needs to be unlocked through social investment.

According to Draghi, the foundations of the European economic growth model are under threat. World trade is in decline, the era of cheap Russian gas has ended, and new security concerns call for a fundamental policy overhaul.

Germany, long held as a beacon of EU stability, growth, and prosperity, is struggling, while other members of the EU concentrate on “getting their own houses in order.” It is not that they do not care about Germany’s predicament, it is just that they do not know how to solve it.

Growth in other nations of the EU appears to be transitory, driven by a single event or benefit. Spain is a good example having seen a singularly remarkable recovery of its tourism sector since the Pandemic, while Italy and Greece have seen above-average growth despite, in Italy’s case, a significant budget deficit and debt-to-GDP ratio.

The EU retains one advantage: a massive, almost captive market for its goods and services. The issue is still how to harness that potential, even after twenty-five years of Union.

The Euro has been driven by the dollar’s price action in the past twenty-four hours. It reached a high of 1.0937 and 11 pm last evening but had collapsed to a low of 1.0718 by 3 am this morning.

It is currently (5.30 am) trading at 1.0775.

Have a great day!