Inflation Update: US Minutes & UK CPI
Key information was unveiled on Wednesday, August 16, 2023, as both the US and the UK disclosed significant economic data. This data included the US central bank's FOMC Minutes and the UK CPI figures, which provided insights into the current state of the worldwide economy and inflation levels. Here are the key takeaways from the Minutes of July’s FOMC meeting and the conclusions from the UK’s CPI in July:
FOMC Minutes: Is Inflation Still Taking a Toll on the US Economy?
In spite of the Federal Reserve's consistent implementation of hawkish interest rate hikes throughout this year, the Minutes from the FOMC’s July meeting may have revealed that inflation’s strain on the largest global economy might not have subsided completely.
The meeting, which took place on July 25-26, indicated that signs of division within the Federal Reserve members became apparent. On the one hand, a considerable number of Federal Reserve officials disclosed their ongoing concerns regarding stubborn inflation and expressed the belief that additional interest rate hikes would be necessary. The Minutes showed that “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.” On the other hand, however, there are two officials that leaned towards keeping the rates unchanged.
The internal division not only underscores the conflicts within the United States’ central bank but may also bring to light the dilemma that the Fed must confront. This involves managing inflation through elevated rates while simultaneously striving to shield the economy from a potential recession that could arise due to a hawkish monetary policy.
Moreover, further accentuating the Fed’s challenges, as stated by Evercore ISI economists, the “Minutes from the July FOMC meeting frame the emerging tension between inflation data that is moderating faster than the Fed anticipated and growth data that is coming in stronger than the Fed anticipated.”
Still, despite the Fed’s overarching hawkishness and the increased likeliness of more hikes in the Fed’s next meeting on October 31st and November 1st, it seems that many investors do not expect more hikes this year.
In addition, whereas the insights derived from the Minutes may not sound as rosy as some may have hoped, it is important to note that they may have conveyed some much-needed optimism as many Fed economists “no longer judged that the economy would enter a mild recession toward the end of the year.” However, overall, many Fed officials predict that the economy may not grow as fast as they would hope for the next two years. If this prediction holds true then unemployment might increase.
The Fed’s Next Steps: To Hike or Not to Hike?
Regardless of the findings, since the markets and the economy are known for their volatility, whether or not rate hikes are really warranted is yet to be determined.
Many Fed members noted that a recent decrease in core goods prices was seen and could serve as “tentative signs that inflation pressures could be abating.” Still, the same member also noted that inflation is still “unacceptably high.”
In the meantime, it seems that the Fed Chair, Jerome Powell, intends to take things “meeting by meeting.” So only time will tell what route the Fed will end up taking.
How Did the Fed’s FOMC Minutes Affect the Markets?
It may not come as a surprise to learn that reports from the world’s most influential central bank can sometimes shift the markets. Accordingly, following the Minutes release on Wednesday, many major Wall Street Indices closed the trading day lower as fears of further rate hikes arose. (Source:Barrons)
As such, the S&P 500 (USA 500) and the Nasdaq 100 (US-TECH 100) respectively shed 0.7% and more than 1%, while the Dow Jones Industrial Average (USA 30- WALL STREET) lost over 0.5%.
It will be interesting to see how these major Indices will perform today as traders and investors had more time to digest the recent news.
July’s CPI Reading Reveals Stubborn UK Inflation
Evidently, inflation is not solely impacting the US economy as it is also exerting its effects on the UK’s economy, according to the latest July CPI reading on Wednesday.
The CPI is a fundamental gauge of inflation and deflation that is highly esteemed by the UK’s central bank, the Bank of England (BoE). And the recent UK CPI report may have raised concerns about the potential persistence of inflationary pressures in the UK. These fears arise in response to the fact that core inflation and consumer service prices continue to remain elevated.
Core inflation, excluding energy and food costs, held steady at 6.9%, maintaining its level from June and surpassing the anticipated Reuters poll figure of 6.8%. Meanwhile, services inflation increased to 7.4% from 7.2%, which is higher than the BoE’s projections.
According to the Office for National Statistics (ONS), “falling gas and electricity prices provided the largest downward contributions to the monthly change in CPIH and CPI annual rates; food prices rose in July 2023 but by less than in July 2022, also leading to an easing in the annual inflation rates.”
As such, it may not be surprising to learn that similarly to the US Federal Reserve, the Bank of England too seems to be holding onto additional rate hikes this year. In addition to the inflation data, the central bank may also take into account the recent labor figures released on Tuesday, whereby it was revealed that UK unemployment rose above-expected levels in June.
Nonetheless, despite the gloomy findings, these figures come against the backdrop of a notable cooldown in annual consumer price inflation rates which came in at 6.8% down from June’s 7.9%. In addition, the ONS revealed that “hotels and passenger transport by air were the classes that provided the largest offsetting upward contributions to the change in the rate.” (Source:CNBC)
The Bank of England is expected to meet on the 21st of September and we’ll have to wait and see what the MPC decides in light of the recent data.
In conclusion, the reports released on Wednesday could offer valuable insights for traders regarding the current conditions of the US and UK economies. The data might influence these nations’ central banks’ upcoming meetings. Still, as additional economic data unfolds throughout this month, it remains to be seen how the markets will respond and what factors could potentially sway these banks’ decisions.
