GBP: Inflation spikes sterling higher but will it lead to anything?
GBP hit a one year high versus the USD and drove above 1.11 against the euro yesterday as inflation in August was shown to have hit 2.9% as measured by CPI, the highest since 2011.
Petrol prices came back to bite in the UK: after two months of stagnant energy costs, weather disruption in the Gulf of Mexico twinned with geopolitical tensions on the Korean peninsula have lit a fire under commodity prices – becoming the main contributor toward August’s jump in both UK inflation rates. Import costs also leapt, rising for the first time in six months as the GBP/EUR exchange rate continues to punish UK importers.
Whether higher energy costs are sustained or not won’t trouble the Bank of England, but today’s rise in core inflation will. Core CPI, which strips out the volatile effects of energy and food costs, touched 2.7% and the highest level since late 2011, leaving Mark Carney and the MPC under pressure to raise borrowing costs. Nonetheless, the Bank’s internal forecasts have proved markedly prescient and see inflation rising further to hit 3% in October before easing into the end of the year.
Inflation is not the single issue of course for the Bank of England and viewed through the prism of stagnant benefit payments and poor wage gains we see little chance that policy will shift in favour of higher interest rates until the UK economy is meaningfully creating “good” inflation i.e. from wages. The Bank of England may talk up the prospects of rate hikes tomorrow as they have noted that expectations are too low in their opinion.
Wages and unemployment are released at 09.30 this morning.
USD: Trump pivots away from Korea to tax
While North Korea told the world that fresh sanctions by the United Nations would cause it to “redouble its efforts to increase its strength to safeguard the country’s sovereignty and right to existence” Trump focused on tax yesterday hinting that the long-expected tax cut that his campaign and the Trump trade was built on was back. US Treasury Secretary Mnuchin said Tuesday that the Trump administration is considering backdating tax reform to the start of this year, which he said would be a big boon for the economy even where they unable to get the corporate tax rate as low as 15% as Trump has said in the past.
Dollar bulls will be looking to today’s PPI numbers to show gathering inflationary pressures in the US economy to allay some of the recent dollar weakness.
AUD: RBA board member says economy “not strong enough” for a rate hike
Reserve Bank of Australia Board Member Ian Harper believes that the recent news out Australia shows an economy that is not strong enough for a tightening of monetary conditions given weakness in employment and wage measures. AUDUSD remains higher against the USD but this is more a story of a weak greenback than anything.
Have a great day.
Jeremy Cook, Chief Economist