Aurelia Butler

The UK’s rate of inflation eased back into single digits in August on the back of lower petrol prices, providing some relief to households as they go into winter.The headline consumer price index was 9.9 per cent higher than a year earlier during the month, down from a 40-year high of 10.1 per cent in July, the first decline in the inflation rate for almost a year. The UK’s inflation rate was still the highest in the G7 in August and economists said a continued rise in underlying inflationary pressure would maintain pressure on the Bank of England to raise interest rates. The figures were better than expectations of a small rise to 10.2 per cent, and economists now expect the inflation rate to hover at the low double-digit level during the autumn, rather than rising to more than 15 per cent.The better outlook for inflation is a result of Prime Minister Liz Truss’s plan to spend up to £150bn to protect consumers from huge energy price rises in October, capping the typical annual household bill at £2,500 rather than let it rise to £3,549.In August, the main reason for the dip in the headline inflation rate was a drop in petrol and diesel prices. A litre of petrol fell from an average price of £1.90 in July to £1.75 during the month, reducing the inflation rate in that category from 43.7 per cent to 32.1 per cent. But in other categories, the inflation rate was still rising. The Office for National Statistics said food inflation was up from an annual rate of 12.8 per cent in July to 13.4 per cent and that services prices were 5.9 per cent higher in August than a year earlier, up from an inflation rate of 5.7 per cent in July. Core inflation — excluding the more volatile food, alcoholic drinks, energy and fuel prices — edged higher from 6.2 per cent in July to 6.3 per cent in August. It is this increase in pressure on prices in goods and services, excluding prices that are most influenced by volatile oil and energy prices, that will worry the Bank of England, on top of the increase in consumer spending power that the government’s energy support and prospective tax cuts will bring. Paul Dales, chief UK economist at the consultancy Capital Economics, said: “Overall and core UK CPI inflation haven’t peaked yet . . . As such, the Bank of England will have to continue turning the screws.”Economists expect a 0.5 percentage point increase when the bank’s Monetary Policy Committee meets next week, with its official interest rate expected to rise from 1.75 per cent now to at least 3 per cent by the end of the year.

Kitty Ussher, chief economist at the Institute of Directors, a lobby group, said: “The fact that the falling headline rate is due to changes in the price of petrol and diesel . . . means today’s news is unlikely to alter expectations of a rise in interest rates when the Bank of England meets next week.”With petrol prices falling back but food inflation rising, the Resolution Foundation think-tank said the figures showed cost of living pressures on poorer families were still rising. Jack Leslie, a senior economist at the foundation, said: “High inflation is set to be with us for some time, particularly for low-income who continue to be hit hardest by high prices.”Other figures released by the ONS showed the effects of falling global oil prices helping industry, with the first monthly fall in producer costs and output prices for almost two years. Input prices were still 20.5 per cent higher in August than a year earlier. More

Good morning. Sometimes markets move because they learn something new. Other times, they move because they are forced to see what was always right in front of them. I think yesterday was the latter kind of day. Disagree? Email me: [email protected] unpleasant encounter with realityThe market had expected — “hoped” may be a better word — that the benign CPI inflation reading for July would be followed by a still more benign one for August. As we all know now, this did not happen. At all. The result is that a chart of month-over-month change in core CPI now shows no appreciable downtrend over the past year. Inflation is certainly not rising. But it sure doesn’t look like it’s falling, either:The market responded yesterday by resetting its expectations for Federal Reserve policy and slashing risk asset prices. The “terminal,” or estimated peak Fed policy rate, expected to arrive early next year, rose 28 basis points, to 4.31 per cent. As of Monday, the futures market had been pricing in no chance of a 100 basis point rate increase when the central bank meets next week. By Tuesday evening it reckoned the chances at one in three. The short end of the yield curve leapt, deepening the inversion of 2- and 10-year interest rates. Stocks got throttled. The Nasdaq lost more than 5 per cent. Every sector was down big. An overreaction? In a sense, yes: there was nothing in the August report that should have fundamentally changed the balance of risks facing the market. Before the report, there were sound reasons to think inflation will abate before long. They remain sound. But the market had been too optimistic about what the path to lower inflation would look like, and had blithely discounted stern statements of intent from the Fed. Tuesday’s rout looks less like the absorption of new information than a loss of naivety. Whatever happens to inflation in the next year or two, a lot of volatility in the price indices is a certainty. Repeating what Unhedged has written before, there is no such thing as high and stable inflation. Even if inflation declines from here, the decline will not be smooth. Here is a chart of core CPI in the last big inflationary episode, at the dawn of the 1980s. It was characterised by nauseating month-to-month swings:This time around, the August numbers won’t be the last surprise. At the same time, though, we know core CPI is something of a lagging indicator. It is clear, as Unhedged wrote yesterday, that housing inflation has all but abated. Indeed housing deflation is threatening. But it will be next year, in all likelihood, before this shift shows up in the CPI numbers. For August, shelter inflation was up .07 per cent from July, a new high for this cycle. And shelter has a 33 per cent weighting in the index.Disinflationary flags are waving outside of housing, too. “We can see disinflation everywhere except in the official CPI statistics,” Paul Ashworth of Capital Economics wrote to clients on Tuesday. When I asked for specifics, he noted that “travel services prices — airfares — are coming down. The dollar is soaring, shipping rates are collapsing. The normalisation of supplier delivery indices suggests shortages are easing, retailers are complaining about being stuck with too much inventory. Used vehicle auction prices are dropping back.”The problem — both before Tuesday’s bad numbers, and after them — is wages, which are increasing at about 6 per cent or more (depending on your measure) against the backdrop of a persistently tight labour market. The fact that services inflation (excluding shelter services) remained elevated in August is a nasty reminder of this fact. As long as wages are running hot the possibility of a wage-price spiral cannot be ruled out, and the Fed cannot back off.Readers may want to go back and reread Fed chair Jay Powell’s recent speech in Jackson Hole. It suddenly looks prescient. A few snippets capture the tone:Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labour market conditions . . . estimates of longer-run neutral are not a place to stop or pause . . . The historical record cautions strongly against prematurely loosening policy . . . Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s . . . longer-term inflation expectations appear to remain well anchored . . . But that is not grounds for complacency, with inflation having run well above our goal for some time . . . The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched . . . we must keep at it until the job is doneOne CPI report, benign or malign, was never going to sway the Fed. Whether they keep plugging at 75 or push to 100, the central bank knows it has a long way to go. Until wages and the prices that track wages are way down, they are not going to pivot. Why would they?One good readIn case you missed it yesterday, the FT’s “debt monsters” compendium of hyper-leveraged corporates facing scepticism from bond markets is a rich menu of binary bets — companies that will either be broken by a downturn or catapult out of it. More

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Economists and investors are braced for aggressive Federal Reserve interest rate increases to continue beyond September after an unexpected jump in monthly inflation reignited fears over the US central bank’s grip on persistent price pressures.US consumer price growth accelerated once again in August, defying expectations for a 0.1 per cent monthly decline, as a steep slide in energy prices failed to offset rising costs elsewhere. Meanwhile “core” inflation, which strips out volatile items such as energy and food, registered an alarming 0.6 per cent increase for the month.“To call this a disappointment would be an understatement,” said David Rosenberg, chief economist and president of Rosenberg Research. “All we’re left with is the view that the [Federal Open Market Committee] hawks so far continue to have the story right and they are in charge.” He added: “Whatever the recession odds were before CPI, even if that’s not your base-case scenario, those probabilities have taken a significant leap forward.”Most economists now expect the FOMC to implement a third-consecutive 0.75 percentage point rate rise at the very least at its meeting later this month, in a move that would lift the federal funds rate to a target range of 3 per cent to 3.25 per cent.But on Tuesday, traders in fed funds futures contracts also raised the odds of a full percentage point increase in September to roughly 30 per cent, according to CME Group.

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Stocks plummeted as a result, with the S&P 500 down 4.3 per cent in its worst trading day of the year. The Nasdaq Composite dropped by more than 5 per cent. Yields on short-dated US government bonds, which rise as prices fall and are highly sensitive to changes in the policy outlook, also surged. More likely, however, is that the Fed chooses instead to extend its series of 0.75 percentage point rate rises beyond this month and maintain interest rates at a level that restrains economic activity for longer.“This [CPI] number is more about December than it is about anything else,” said Tim Duy, chief US economist at SGH Macro Advisors. “We’re not seeing enough of the results of monetary tightening showing up in the economy to think that the Fed’s job is anywhere near done.”Futures markets now point to the benchmark policy rate rising to above 4 per cent by year-end, before peaking at about 4.3 per cent in March 2023.

“The more likely outcome here is that we get big hikes for longer,” said Jonathan Millar, a former Fed economist now at Barclays.However, economists’ primary concern is that expectations of future inflation could spiral out of control, setting off a feedback loop whereby workers demand higher wages and businesses are forced to continue raising prices, leading to higher overall inflation.Diana Amoa, chief investment officer at Kirkoswald, warned that outcome is becoming more plausible the longer inflation remains elevated.While the jump in inflation figures comes as a blow to the Fed, it vindicates officials’ decision to set a high bar for reconsidering their approach to monetary policy — not least because they have been wrongfooted by price rises in the past.Fed governor Christopher Waller vowed last week not to repeat previous mistakes, pointing to a temporary dip in inflation last summer that went on to become the worst problem the central bank has seen in four decades.

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“The consequences of being fooled by a temporary softening in inflation could be even greater now if another misjudgment damages the Fed’s credibility,” he said. “So, until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy.”More specifically, Roberto Perli, a former Fed staffer who is head of public policy at Piper Sandler, said monthly inflation figures will need to fall to a level that amounts to a less than 3 per cent annualised pace on a sustained basis. Monthly core CPI is currently annualising at 6.4 per cent.“We’re just not even remotely close to what the Fed wants to see,” said Perli. “The more reports like this we get, the farther out the possible pause or pivot is going to go.” More

SYDNEY (Reuters) – Asian shares tumbled, the dollar held firm and the U.S. yield curve was deeply inverted on Wednesday, as a white-hot U.S. inflation report dashed hopes for a peak in inflation and fuelled bets that interest rates may have to be raised higher and for longer. U.S. Labor Department data showed on Tuesday the headline Consumer Price Index gained 0.1% on a monthly basis versus expectations for a 0.1% decline. In particular, core inflation, stripping out volatile food and energy prices, doubled to 0.6%.Wall Street saw its steepest fall in two years, the safe-haven dollar posted its biggest jump since early 2020, and two-year Treasury yields, which rise with traders’ expectations of higher Fed fund rates, jumped to the highest level in 15 years. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.3% in early Asia trade on Wednesday. Resources-heavy Australia plunged 2.8%, while Japan’s Nikkei tumbled 2.7%. Both S&P 500 futures and Nasdaq futures rose 0.1%, after a heavy sell-off. The Dow Jones Industrial Average plunged 3.94%, the S&P 500 lost 4.2%, and the Nasdaq Composite dropped 5.16%. “Markets have reacted violently to what I would consider to be a modest miss in U.S. CPI. Stocks and bonds were smoked, taken to the principal’s office for a good old-fashioned, old-school pre-woke thrashing,” said Scott Rundell, chief investment officer at Mutual Limited. “Futures have stabilised, so we might see a dead-cat bounce tonight.”Financial markets now have fully priced in an interest rate hike of at least 75 basis points at the conclusion of the FOMC’s policy meeting next week, with a 33% probability of a super-sized, full-percentage-point increase to the Fed funds target rate, according to CME’s FedWatch tool.”With another 75bp hike more than fully priced into the market following the CPI report, there is no reason for the Fed not to deliver another super-sized move,” said Kevin Cummins (NYSE:CMI), chief U.S. Economist at NatWest Markets. “We now expect the FOMC to follow up July’s large 75bps rate increase with a similar 75bps move in November (up from our earlier 25bps call) and another 50bps in December to 4.25-4.50% (up from our earlier 25bps call).”In the currency markets, the U.S. dollar held firm against a basket of major currencies at 109.9, after jumping 1.4% overnight on the surprisingly strong U.S. inflation report.It hovered close to its 24-year peak against the rate-sensitive Japanese yen at 144.57 yen. The yen has been a victim of the dovish monetary stance from the Bank of Japan, in contrast with rate hikes elsewhere. The two-year U.S. Treasury yield scaled a new 15-year high of 3.8040% on Friday, as the curve gap with the benchmark ten-year yields hovering around 34 basis points, compared with 16 bps a week ago.The yield curve inversion is usually treated as a warning of recession. The yield on 10-year Treasury notes rose to 3.4448% compared with its U.S. close of 3.423% on Tuesday. Oil prices recovered some ground on Friday, after falling in the previous session. U.S. crude settled up 0.4% at $87.63 per barrel and Brent settled at $93.44, up 0.3% on the day.Gold was slightly higher. Spot gold was traded at $1701.7526 per ounce. [GOL/] More

TOKYO (Reuters) – The dollar climbed close to a 24-year peak against the yen on Wednesday amid a jump in U.S. yields after hotter-than-expected inflation boosted bets for even more aggressive monetary tightening by the Federal Reserve next week.The dollar rose as high as 144.965 yen in the Asian session, taking it close to last Wednesday’s high of 144.99, a level not seen since August 1998, before last trading little changed at 144.56.Overnight, the currency pair, which is extremely sensitive to rate differentials, surged 1.26% as 10-year Treasury yields climbed to a three-month high following an unexpected rise in the U.S. consumer price index (CPI) for August.”This has really shattered the illusion … that inflation had peaked and was coming down,” Ray Attrill, head of currency strategy at National Australia Bank (OTC:NABZY), said in a podcast. “Hence markets have decided that next week’s Fed decision is not between 50 and 75 (basis point increase), it’s now between 75 and 100.”Money markets currently price 37% odds for a full percentage-point hike on Sept. 21, versus a 63% probability of another 75 basis point move. Nomura’s economists also said they now believe a 100 basis-point rate hike is the most likely outcome.”Markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” they wrote in a note.The dollar index, which measures the currency against six major peers including the yen, euro and sterling, was little changed at 109.750, after surging 1.44% overnight, its biggest one-day percentage gain since March 2020.The euro edged up 0.11% to $0.9981, clawing back a little of Tuesday’s 1.52% tumble. Sterling rose 0.17% to $1.151, but after a 1.61% plunge overnight.”The dollar is screaming overvaluation, but in order to see that as correct, you’re going to need some sort of catalyst for a cyclical downturn in the dollar, and these latest developments have challenged that,” NAB’s Attrill said.The risk-sensitive Aussie dollar rose 0.25% to $0.6750, although that jump paled in comparison with its precipitous 2.26% slide overnight.Leading cryptocurrency bitcoin lost another 0.21% to $20,191.00, following a 9.93% decline on Tuesday. More