Cost of living crisis spirals with 10.1% inflation

It’s been another gloomy week for economic data with UK inflation not showing any signs of slowing. The US CPI reading last week was celebrated for being below consensus estimates whereas, in the UK, we have not been so lucky. The first double-digit CPI reading in 40 years at 10.1% in July was 0.3 percentage points higher than the consensus expectation. Even the ONS was surprised by the data as prices historically fell in July but continued food inflation at 12.7% drove the rate higher.

Core CPI, the measure of inflation that excludes energy and food prices, also beat expectations at 6.2% indicating that inflationary pressure is continuing to surge throughout the economy. The data is likely to empower the Bank of England to act with faster and larger interest rate rises, particularly as the Bank comes under political criticism for failing its first true test on inflation since it became independent in 1997. Another rate increase of 50 basis points is expected at the next meeting in September while inflation is expected to rise further to 13% by the end of the year.

Sterling rose to 1.2120 against the euro before paring back to 1.1782 as of publication. The pound also rose against the dollar to 1.2143 before falling to 1.1853. UK government bonds sold off, driving the biggest jump in short-term borrowing costs since 2009. The inflation news led the yield on two-year gilts to jump 0.11%, an overall rise of about half a percentage point since last week.

UK consumer confidence fell to its lowest level since the data was first produced in 1974 as the cost of living stokes concern over personal finances. Although sales rose slightly 0.3% in July, data for the last three months showed a 1.2% decline. When online sales led by Amazon Prime Day are excluded, sales are down 3.4% annually and an expected 75% increase in energy bills in October is driving lower spending from consumers. UK real wages fell by 4.1%, the fastest pace since at least 2001 despite extremely low unemployment.

In emerging markets, inflation hit a 17-year high in Nigeria of 19.6% as food and energy prices rose rapidly. The Bank of Nigeria targets 9% inflation and has hiked interest rates by 250 basis points since May. Given the recent data, further rate rises are expected.

Turkey has made a surprise 100 basis point rate cut despite inflation soaring over 80%. 

The central bank justified the move by claiming that indicators suggested a slowdown in economic activity in the third quarter. The lira dropped to 18.14 against the dollar, its weakest intraday level since its major slide last year. The central bank supposedly targets 5% inflation but the rise of political influence has led to economists disregarding this figure in their predictions.

In Ghana, the Bank of Ghana increased interest rates by 300 basis points to 22%, its largest single rise since 2002. The bank has now increased its interest rate by 850 basis points since November after having held rates stable for the previous six years. These rate rises follow a pattern of large hikes in countries around the world including Hungary, South Africa and Mexico.

Earlier this week, China cut its key interest rate by 10 basis points and the world’s second-largest economy desperately tries to prevent its oncoming slowdown. Continuous Covid-19 lockdowns combined with a property crisis have severely muted economic activity. Youth unemployment hit a record 19.9% last week while the important retail sales figure was only a 2.7% rise compared with a 5% estimate.

China is piling on billions of dollars worth of stimulus including $148 bn for real estate bailouts but the economy is still only narrowly avoiding contraction. Rising levels of social control as a Zero-Covid policy is still pursued combined with reduced output growth have damaged the investor outlook in the country. The yuan weakened to a one-week low of 6.7715 against the dollar after the unexpected rate cut.

This week’s light-hearted news concerns some medieval healthcare suggestions revealed this week by Cambridge University. Researchers shared manuscripts that suggested several cures for common ailments including baking a salted owl and grinding it into a powder to prevent gout. The wide range of cures suggested that medieval Britain suffered from ailments similar to what we suffer from today although unfortunately, they didn’t have the wonders of modern medicine to turn to!

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