Good morning,

UK inflation surprises higher

The UK economy was the focus for the markets yesterday with headline inflation readings and headlines about the possible impact of a British exit from the European Union.

Inflation in March moved further from stagnation and deflation following a slight pause in February. It came through at 0.5% versus an expectation of 0.4%. I would say in the next year we’re going to start looking at headline CPI numbers – the headline rate of inflation – above 1%. But it’s a slow, slow crawl back. We’re having a huge negative effect because of the previous falls in oil prices. We’re still talking about oil which is at $40 a barrel, compared to where it was – $100 a barrel about 18 months ago, so those are still working through the inflation figures at the moment.

Watch the core

If you take oil and food out and look at something which we call the core CPI, that’s about 1.3% to 1.4% at the moment and is actually a closer measure of what prices are doing in the economy.

Bank of England Governor Carney has said that he would need to see “core inflation measures moving notably towards the target” before voting for an interest rate rise. We have long said that a November rate hike remains in play should we negotiate the referendum and vote to Remain and sterling benefited from this near term shot in the arm.

IMF warns on Brexit

Inflation news was superseded by the IMF’s World Economic Outlook paper. The IMF prides itself on telling truth to power and it is endemic of the declining economic powers of the world economy that I could see only two countries – China and Peru – that have had their growth expectations revised higher in the latest World Economic Outlook.

Of course, the issues that the IMF are focusing on such as Brexit, rising populism in the US and Europe, migration flows and ineffective monetary policy are well known. The problem with these pronouncements is that those who they are aimed at – policy and lawmakers – have a record of having to be horizontal over the abyss before action is taken.

The IMF is sounding a warning that the recovery of the world economy is nowhere close to being complete and that without a concerted, united effort to work together economically and politically that growth will stagnate once again.

China and the US to take over

Overnight, as if taking their cue from the IMF’s pronouncements Chinese exports jumped by the most in a year and buoyed hopes ahead of the latest round of Chinese growth numbers due on Friday.

The story now however shifts to the United States. 4 members of the Federal Reserve spoke yesterday with one, John Williams of the San Francisco Fed, saying that 2-3 rate rises in 2016 was a reasonable call. The others, Messrs Harker and Kaplan urged caution akin to the noises heard from Janet Yellen last week.

Today sees the release of the latest ‘Beige Book’ – the survey of regional Federal Reserves with members Lockhart, Powell and Evans all speaking before the end of the week. As we have also pointed out, Thursday sees the latest round of US inflation numbers. Something similar to the UK surprise and the dollar will be going great guns.

Have a great day.

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