Speculation that the BoE could raise borrowing costs sent the pound soaring. It’s currently trading at a one-year high against the US dollar, at $1.327, and a six-week high against the euro at €1.11.
As this chat from the Bond Vigilantes team at M&G shows, inflation is almost a whole percentage point over the BoE’s 2% target.
The jump in the pound pulled shares down in London (as it could hurt exporters). But other markets have continued to rally, sending global markets to their highest ever levels.
Connor Campbell of SpreadEx says:
The markets remained dominated by the reaction to the morning’s UK inflation reading, with a bit of North Korea/Hurricane Irma relief thrown in for good measure.
That relief has sent the MSCI All Country World Index to a new alltime high this afternoon.
Here’s our latest inflation news story:
And that’s all for today. Thanks for reading and commenting. GW
Newsflash: Britain’s next budget will be delivered on 22nd November.
This will be chancellor Philip Hammond’s opportunity to announce new tax and spending plans, perhaps tear up the public sector pay cap, and try to guide the economy through the Brexit process.
Here’s another depressing, and informative, chart from the Resolution Foundation, showing how public sector workers have suffered falling real wages for much of the last decade.
In the last hour, the government has announced that the 1% pay cap will be lifted for the police and prison workers. They’ll get pay rises of 2% and 1% respectively -- still not enough to keep up with inflation.
Trade unions have already warned that it’s not enough.
Important media news: Rupert Murdoch’s attempt to take control of Sky has hit a potentially serious hurdle.
Culture secretary Karen Bradley has just announced that she’s ‘minded’ to refer the bid to the competition authorities on the grounds of broadcasting standards (basically, whether Fox is a fit owner).
That’s a new development; Bradley is also planning to refer the bid on the grounds of media plurality.
Here’s the full story:
Sky’s shares have fallen by almost 3%, to their lowest level since Murdoch made his bid last December, as traders digest this new development.
Today’s inflation figures will be high on the agenda when the Bank of England meets later this week to set interest rates.
Last month, the MPC voted 6-2 to leave borrowing costs unchanged, with the majority judging that the economy was too weak to justify a hike.
On Thursday, the committee will be up to full strength of nine policymakers as new deputy governor Dave Ramsden joins the throng. So could policymakers decide ‘enough is enough!’ and raise interest rates from their record low of 0.25%?
City experts are divided on this issue.
Emanuele Canegrati of BlackPearlFX argues that the BoE should use the levers of monetary policy to get inflation down to its 2% target, and ease the cost of living squeeze.
Ben Lord of M&G predicts that the Bank’s chief economist, Andy Haldane, will vote for a rate hike on Thursday, resulting in a 6-3 split but no rate rise.
Lord believes that the Bank should sit tight, as inflation may peak soon.
“Increased disagreement on the MPC will likely lead to some sterling strength, in the short term at least...
But if we are a month or so away from peak inflation, to hike rates and strengthen the pound....would be overly myopic and pro-cyclical in my view.
Kathleen Brooks of City Index points out that the City believes there is a greater chance of a rate rise before Christmas.
The Overnight Index Swaps market has already rushed to price in a greater probability of a rate hike from the BOE by year end. The market now expects a 30% chance of a hike in December, this compares with 20% a week ago.
We also have fresh evidence that the housing boom in Britain’s capital is faltering.
London house prices rose by just 2.8% in the 12 months to July 2017, much slower than the national average of 5.1%.
Indeed, that makes the London the slowest region in England.
London continues to be the region with the highest average house price at £489,000, followed by the South East, at £321,000, and the East of England, at £290,000 respectively.
Public sector workers will see their real wages shrink by around 2% this year, unless the pay cap is dropped.
Liberal Democrat leader Vince Cable says Theresa May’s government needs to act urgently:
“Rising inflation shows how urgent it is to address the sense of unfairness around the pay cap.
“With these numbers our nurses, teachers and other public sector workers will experience a 2% pay cut in the coming year. This will only aggravate the recruitment and retention crisis we are facing.
“The government must take urgent steps to lift the pay cap for all public sector workers, and increase wages in line with inflation.”
Andrew Sentance of PwC (and a former Bank of England interest-rate setter) fears that inflation will keep rising as the full impact of the weak pound ripples through the economy.
He predicts that the consumer prices index will rise over 3% later this year, weakening growth.
With very well-developed and complex supply chains, it can take a number of years for a decline in the exchange rate, which raises import prices, to feed through fully to consumers.
“This suggests that the recent squeeze on consumer spending from higher inflation will continue to dampen growth in the UK economy in the second half of this year and next year. There is not much sign yet that consumers will get any early relief from the surge in inflation following the Brexit vote last summer.”
Britain is now suffering its SECOND cost of living squeeze in a decade.
As thus chart shows, inflation (in pink) outpaced wage growth once the financial crisis began in 2008. Real wages didn’t turn positive until 2014, but have been shrinking since early 2017.
The Treasury have sent a comment over, but it doesn’t reveal whether the public sector pay cap is being axed....
‘We know some families have concerns with their day to day cost of living.
That’s why we are boosting take home pay with tax cuts for over 30 million people and a National Living Wage that is giving the lowest earners their fastest pay rise for 20 years.’
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