Inflation leaps well above expectation

Inflation data released yesterday showed a significant increase over last month’s figures and the markets expectations.

In January, consumer price inflation rose to 1.8% from 1.3% in December and analysts’ predictions of an increase to 1.6%. The increase, which means inflation is creeping nearer to the Bank of England’s 2% target, was put down mainly to increases in petrol prices at the pump.

The data provides confirmation of the Bank of England’s decision to leave rates on hold although the market still places a high degree of certainty on a cut in rates sometime later this year.

The pound is being driven by multiple features. The politics of the trade negotiations with the EU are a major factor currently, as is the strength of the dollar.

Recent data releases have been encouraging but the degree of uncertainty, fuelled by hawkish comments coming from EU officials, is beginning to be a cause for concern.

Yesterday, there were comments about how the EU will determine UK access to its financial markets. With 80% of UK GDP now being derived from services, access to global markets is a major concern. The UK will receive no special treatment and the EU will determine how the UK operates in its backyard in a similar manner to how it treats the U.S. and Japan.

The pound has now had five consecutive down days although the moves have not been substantial in terms of size in points.

The upcoming budget is expected to open the fiscal spigot with increases in public spending across a wide range of sectors inducing police, social care, the NHS and education.

Yesterday the pound fell after an initial rise following the inflation data, it reached a low of 1.2907, closing at 1.2923.

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Strong data supports Fed

The dollar index’s march towards 100 appears to be unstoppable. The perfect storm of comparative weakness of competitor economies, the concerns over Coronavirus and positive economic data keeping the Fed at bay all point to a continuation of the rally.

Taking Coronavirus in isolation, it seems that no matter whether the number of new cases falls or rises, it is taken as positive for the greenback by the market.

A fall indicates that the fallout in the ability of China to provide a seamless supply of goods to the U.S. is positive for the economy while a rise has traders jumping on the risk appetite bandwagon, and the dollar rallies on safe haven flows.

The importance of producer prices has fallen somewhat as inflation has been well controlled for a considerable time but as CPI and other measures have begun to increase, analysts are beginning to consider factory gate price increases again.

Yesterday’s release of producer price data for January saw an increase from 1.3% in December to 2.1% Last month. The Fed is keeping an eye on inflation as the core continues to rise above its target of 2%.

Over several years inflation has been under control in most G7 economies but with yesterday’s data in the UK and a substantial rise in U.S. input prices, the focus may be about to shift and could mean the end of ultra-low interest rates.

Yesterday, the dollar index rose to a high of 99.72 and closed at 99.61. Barring the market suffering a bout of altitude sickness, the financial barometer looks set fair for a test of the 100 level.

Single currency below 1.08 for the first time in three years.

There is an interesting dichotomy between how the Eurozone sees itself and the parlous state of its economy and the continuing weakness of its currency.

Rather than battening down the hatches and getting a trade deal with the UK done following Brexit the EU is trying desperately to regain its place in the world, despite its major economic force being in the doldrums with its major industries losing market share and seemingly unable to break free of the shackles of its fear of inflation.

Germany has a substantial fiscal surplus which is crying out to be used to kick start not only its own economy but those of its Eurozone partners.

In historical terms, it has taken no time at all for the experiment of tying the nations of Europe to an economic union to reach the brink of failure.

Yet, politically, ask any EU official if they are concerned about the EU or Eurozone collapsing and you will be met by a major bout of head shaking.

The political gravy train rolls on with politicians seeming unfazed as the top-heavy union with too many senior officials ensuring that they get the rewards they feel they deserve.

Ursula von der Leyen has inherited what is considered the top job as EU Commission President mostly since Angela Merkel the German Chancellor wanted a German in charge, But having forsaken the Presidency of the ECB, Ms Merkel now faces demands from the Central Bank that will require the country’s fiscal rule book to be ripped up.

Outside of financial circles, there is a feeling of fiddling while Rome burns as the EU continues to go about its daily duties seemingly unaware of the gathering storm clouds.

The currency continues to weaken having fallen by close to 4% this year. With inflation continuing under control, the inflationary aspects of such a fall are being disregarded (it is doubtful this would be treated in such a cavalier fashion with a German in charge at the ECB). A weakening currency provides a competitive edge in export markets, but the EU needs to repair domestic demand before it renews its desire to be the major trading force globally.

Yesterday, the single currency reached its lowest level in three years. It fell to 1.0782 before rallying a little to close a shade higher on the day at 1.0810