21 November 2024: Reeves’ budget may cause a spurt in inflation

The Bank of England Governor agrees with the head of the British Retail Consortium (BRC) that the Budget may lead to a spike in unemployment and inflation. Andrew Bailey has known since he took over as Governor that he must “play the cards that the Treasury deals him” relative to creating monetary policy that dovetails with fiscal policy.

Nonetheless, with employer costs set to increase as their National Insurance contributions increase and the minimum wage rises the retail and hospitality sectors are set to be disproportionately affected by the Government’s need to raise twenty-two million pounds to plug the apparent black hole in the country’s finances.

Addressing MPs in the House of Commons, Bailey agreed that there is a risk to jobs following the Budget.

The BRC, which represents some of the biggest companies in Britain, has written to the Chancellor warning that the measures she announced last month, including the new packaging levy, would add up to seven billion pounds to the industry’s costs.

Bailey told MPs, “I have seen the BRC’s letter, and I think they are right that there is a risk here that the reduction in employment could be higher.

Should there be job losses in both retail and hospitality, it would adversely affect the levels of revenue raised by the new measures, since not only would employers not be paying the increased NIC for employees that they let go, but those workers would be claiming unemployment benefits.

The October inflation report was published yesterday, and it showed that headline inflation rose to 2.3% last month, up from 1.7% previously. The increase was solely due to the increase in the energy cap, which drove domestic fuel bills higher.

The City believes that the increase in inflation has put paid to any hopes of another rate cut when the MPC meets on December 19th.

Following the Budget, the Conservative Party, with its new leader in place, lay in wait to lay the blame for both rising inflation and any slowdown in economic output firmly at the feet of the Chancellor.

As they emerge from four months of self-enforced inaction, the opposition is ready to fight back following months of having to hear the Government blaming it for the state of the economy.

During Prime Minister’s questions this week, Deputy Prime Minister, Angela Rayner was subject to a severe probing from little-known Shadow Northern Ireland Secretary, Alex Burghart, about the farmer’s inheritance tax rise and the growth data which was published earlier in the week.

Burghart put in a feisty performance in his PMQs debut that may see Badenoch call him up again.

The pound is being driven by the risk-off attitude of the market since the situation in Ukraine has taken a significant turn with Kyiv firing U.S. and British long-range missiles into Russian territory, drawing a stinging response from the Kremlin.

It fell to a low of 1.2630 and closed at 1.2646.

Although regional Fed Presidents appear to have the ear of the market when commenting on the economy, Fed Governors who have a permanent role on the FOMC appear to have begun to make their views felt.

Following Michelle Bowman, making headlines by voting against the fifty-point cut in interest rates in September, and carrying on her hawkish rhetoric, she has received support from a colleague who has been a Fed Governor for twenty months but rarely made her views public.

Lisa Cook highlighted on Wednesday that the central bank might consider halting interest rate cuts temporarily if inflation decelerates while the labour market maintains its strength. Cook underscored that persistent core inflation remains a significant challenge, necessitating further measures to achieve the desired economic equilibrium.

Cook emphasized that the Fed’s prior rate reductions have played a critical role in easing economic constraints. However, she noted that the trajectory of future monetary policy will hinge on forthcoming economic data, inflation trends, and the balance of associated risks.

Discussing labour market dynamics, Cook acknowledged recent signs of moderation, attributed to temporary disruptions such as strikes and adverse weather conditions. Nonetheless, she pointed out that the labour market has largely stabilized and is no longer a primary driver of inflationary pressures.

Cook also reiterated Jerome Powell’s confidence in the resilience of the economy. She highlighted ongoing economic expansion and noted that slowing wage growth strengthens confidence in a gradual decline in inflation over time.

She believes that housing costs are still the highest contributor to core inflation, and greater efforts are required to stabilize this sector, which shows up more clearly in Personal Consumption Expenditures.

Donald Trump continues to make controversial picks for his first cabinet, picking individuals with knowledge of the workings of the departments they will be responsible for but little or no political experience.

He is yet to announce his pick for Treasury Secretary, although he is receiving “help and advice” from Wall Street.

The jockeying for President-elect Trump’s pick to run the all-important Treasury Department is coming down to the wire.

A pick for Treasury is on track to be sorted out by this week after Apollo Global Management co-founder Marc Rowan and Kevin Warsh, a former member of the Federal Reserve Board of Governors, have emerged as front-runners, as well as Key Square Group founder Scott Bessent.

Rowan was expected to meet with Trump at Mar-a-Lago on Wednesday, according to multiple sources familiar with the matter. The Trump team and those at Apollo Global did not comment on the news.

The dollar continues to benefit from both economic and geopolitical developments and is expected to remain volatile until Trump’s inauguration.

The Index rallied to a high of 106.92 yesterday and closed at 106.65. There does appear to be some latent selling interest on any approach to 107 which will need to be cleared if the Greenback is to reach its medium-term target of 110.

What is the purpose of the European Union?

It is a trading bloc primarily but is not fulfilling that significant advantage by encouraging its members to take advantage of the benefit’s membership affords them. The region has been blindsided by the rise of China as a force in global trade.

It is hard to say what the benefits of a monetary union are, particularly since it has taken place without a fiscal union or any creation of a single tax regime, as has been demonstrated by this week’s inflation figures.

It defies logic that the ECB can create monetary policy for the twenty-country union when inflation, which is supposed to be coming under control, still varies so widely that it had a range of 0.1% to 5% last month. The ECB is on track to cut interest rates to 2.5% by the middle of next year, but if inflation remains as varied, neither end of the price spectrum will be satisfied.

ECB President Christine Lagarde speaks of what needs to be done since Europe’s social models are utterly unsustainable.

There is no unification in any of the major areas which the union was designed to fulfil. Twenty-five years into the experiment, no discernible benefit has been gleaned. The single currency, far from being a candidate to be considered as the global reserve currency, has fallen a long way behind the Chinese Yuan in terms of global trade.

Weak and uncompetitive economies risk running out of money to fund their sprawling welfare states unless they can reverse decades of relative decline and emulate America’s runaway success in tech, the president of the European Central Bank (ECB) cautioned.

“Our productivity growth in Europe is progressively slowing, which means that our ability to generate income is diminishing. If left unchecked, we will face a future of lower tax revenues and higher debt ratios,” Christine Lagarde said in a speech in Paris.

“We face a rising old-age dependency ratio, which will drive up public spending on pensions. It is estimated that governments will need to spend more than €1 trillion a year to meet our investment needs for climate change, innovation, and defence.

Many years ago, when the Euro was in its infancy, several economists were asked if the common currency would outlast the current generation.

The answers were marginal at best, with the respondents highlighting the issues that are now plaguing the union as tier major concerns.

No one seriously believed that the near collapse of the German economy following Angela Merkel’s retirement but her “parting gift” of placing compatriot Ursula von der Leyen at the summit of the European Commission, which led to the passing over Bundesbank President Jens Weidmann for President of the ECB, has been an unmitigated disaster.

Some tough decisions need to be taken if the Union is to recover to become the global economic force it was designed to be. The first should be to adopt Mario Draghi’s design for future competitiveness and increased productivity.

The Euro has been unable to sustain its recent rally, falling back to challenge the 1.05 level yesterday. It fell to a low of 1.0506 and closed at 1.0539.

Have a great day!