“Central bankers are in an unenviable position,” says Ben Wright in The Daily Telegraph. “They must choose between death by a thousand price rises or the electroshock therapy of massive interest-rate hikes.” There are worrying signs that inflation is becoming embedded in the economy. UK service-sector inflation hit 5.9% in August, threatening a “wage-price spiral”. Even if headline inflation does peak soon, it could then stay “well above central bank targets for much longer than previously hoped”.
With energy prices falling, concern on both sides of the Atlantic has shifted towards core inflation, the measure that excludes volatile food and energy prices, says Hermione Taylor in the Investors’ Chronicle. The UK’s costly “new energy-price scheme means that the inflation outlook has materially improved”, banishing talk of 20%+ consumer price inflation.
But annual core inflation crept up to 6.3% in August. The prospect of “stubbornly high” underlying inflation shows that “we are not out of the woods yet”. Repeated inflation shocks have kept central bankers in tightening mode. This week’s full percentage-point jump in Sweden was the biggest hike since the 1990s.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Many investors are still holding out hope for a Fed “pivot… the mythical moment when it decides to dial down the interest-rate rises that have been pummelling asset prices this year”, says Katie Martin in the Financial Times. The result is traders have had “a fainting fit every time this year that US inflation data has turned out to be surprisingly strong”.
You would think they would have got the message by now, but it seems some are struggling to adjust to the new reality. “It’s the… triumph of hope over experience,” says Trevor Greetham of Royal London Asset Management. “It’s a massive regime change. People still want inflation to be transitory and temporary.”
A Goldilocks scenario?
Asset manager surveys show that market opinion is currently evenly split between bulls and bears, says John Authers on Bloomberg. The bulls are betting that the threat of recession will prompt the Fed to pivot towards easier money “in the next few months”. Yet “inflation is too well entrenched for the Fed to be able to ease much, if at all, by the end of next year”. Count me a “bear”.
The problem with the bull case is that the only thing that will make the Fed change course is a nasty recession in the US, says James Mackintosh in The Wall Street Journal.
“But markets aren’t seriously preparing for a recession, with bets instead assuming inflation comes down sharply without killing the economy” or seriously damaging corporate earnings. Asset prices “have further to fall because investors are still clinging to the vestiges of the belief that inflation will soon be conquered”.
-
Digital Services Tax: will Reeves let big tech off lightly to avoid tariffs?Rumours are circulating that the Digital Services Tax on big tech companies could be cut as Rachel Reeves seeks to appeal to president Trump
-
Rachel Reeves set to increase penalties for filing tax returns lateThe Chancellor will announce hikes to penalties for late tax returns in her Spring Statement as she scrambles to raise an extra £1 billion a year. Here’s what you need to know
-
Trapped in a time of zombie governmentIt’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
-
America is in deep denial over debtThe downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
-
Bank of England raises interest rates to 5.25%The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
-
UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
-
VICE bankruptcy: how did it happen?Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
-
Would a food price cap actually work?Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
-
UK inflation slides to 8.7% - what does it mean for your money?News Inflation has dropped below 10% for the first time in months, but with food prices at a 45-year high, is this good news and what does it mean for your money?
-
Why the UK equity market is shrinkingAnalysis The crisis has been building for 25 years, says Max King, and it will take decades to reverse the trend.
