Energy surge fuels inflation… but for how long?

After a few consecutive months of dwindling inflationary pressure on both the consumer and producer side, today’s CPI came in slightly ahead of expectations and hit the fastest rate of price rises for over six months. The surge in inflation was primarily driven by energy prices, which rose by close to 3% in August alone (gas surged by over 6%), but we expect more of this pain to be shown in September’s figures as the longer-lasting impacts to supply corridors in the Gulf of Mexico are felt more solidly.

What does this mean for the Fed? The central bank forecasters will be well aware that the inflationary impacts of energy costs can be reversed as quickly as they emerge in the first place and raising rates for the sole purpose of quashing energy costs will do more harm than good. As such, Yellen and Co are more likely to overlook any rate rise pressure coming from prices today, but will be watching to see if these trends are sustained.

As a result of this, the dollar’s scarcely moved, with sterling being the main mover so far today.

Sterling surges, striking a multi-year high

The Bank of England are making hawkish noises once again, but we are getting into ‘The Boy Who Cried Wolf’ territory on UK interest rates. At the May Quarterly Inflation Report, we noted the Bank of England was looking to inject a little two-way risk into prices. Today’s comments on the market’s proximity to a rate rise have the same impetus, especially given the recent drift towards trade weighted lows on the Sterling index.

Although CPI may top out a little over 3% in October, expect lower than current levels by the end of the year. Allied to a picture of a pre-recessional economy and poor wage figures, any increase in interest rates this year would be a mistake. Today’s language will prepare markets, consumers and businesses for when hikes do come and also get some of the inflation hawks off of the MPC’s collective back.

Sterling has rallied on the announcement naturally but further gains will depend on stronger economic and political foundations.

Aussie dollar rides the Chinese rollercoaster

It has been a volatile session for the AUD but the currency’s managed to hold on to most of the gains afforded to it by a strong employment report. The Australian economy managed to add 54,200 jobs over the quarter compared to wider expectations of gains of 20,000 and with more people participating in the jobs market than had been expected too.

The dip came as China released retail sales and industrial production data that suggested a slowing of the Chinese economy in August.

Despite the strength in the Australian data, expectations of whether the Reserve Bank of Australia has enough confidence to cote for higher rates will be crucial to the AUD’s path moving forward.

Have a great day.