Further interest rate rises by the US Federal Reserve and other central banks could be needed amid persistent inflation and a strong labour market.
There are fears that central banks are likely to keep interest rates high owing to persistent inflation. Global stocks and US bond prices fell during February after unexpectedly strong US jobs growth and disappointing inflation data raised concerns that the Federal Reserve (Fed) may need to hike interest rates further this year.
The latest data shows inflation is coming down from previous peak levels, but the pace of reduction appears to be slowing. US consumer prices climbed 6.4% in January from a year earlier, down from 6.5% in December. It was the seventh straight drop in inflation and well below the peak of 9.1% in June.
Employers added 517,000 jobs in January, which is three times what analysts were expecting. Meanwhile, unemployment fell to 3.4%, the lowest since May 1969. US business activity also rebounded in February, reaching its highest level in eight months, according to the S&P Global Purchasing Manufacturer’s Index.
The Fed raised short-term interest rates by a quarter of a percentage point, bringing the benchmark rate to a range between 4.50% and 4.75%. The central bank has been raising its benchmark interest rate since last year to bring inflation under control.
Fed officials acknowledged that while inflation has eased, it remains elevated. The central bank has cautioned that if the strong jobs market persists then additional interest rate increases will be needed to cool inflation, and borrowing costs may need to peak at a higher level than expected.
UK inflation may have peaked
The UK avoided entering a recession by the slimmest of margins after showing zero economic growth in the final three months of 2022. But the economy faces tough prospects as households continue to deal with double-digit inflation.
UK inflation fell for the third consecutive month in January to hit 10.1%, down from 10.5% in December last year and a peak of 11.1% in October*. Despite the fall, inflation remains higher than in the US and Europe, with some forecasters saying the UK’s worker shortages and constraints on the economy will add to inflationary pressures.
The Bank of England (BoE) raised interest rates by 0.5 percentage points to a 14-year high of 4%, piling more pressure on mortgage holders and borrowers who are struggling to repay loans. The bank is now expected to slow the rate of tightening after a series of increases last year.
The FTSE 100 reached a new record high, breaking the 8,000 point barrier as fears of a global recession eased. Shares were boosted after a inflation figures raised hopes that the BoE could end its run of rate hikes sooner than expected.
Euro area avoids recession
The euro area posted economic growth of 0.1% in the final three months of 2022, avoiding a recession even though sky-high energy costs and rising interest rates are taking a toll. The region has been under significant pressure following Russia’s invasion of Ukraine, as high food and energy costs have compounded supply chain bottlenecks.
Consumer price inflation across the 20 nations that share the euro was 8.6% in January, down from 9.2% the previous month. It was the third straight fall in a row and suggests price pressures may have peaked. The European Central Bank (ECB) raised interest rates again by half a percentage point to 2.5%. It pledged to “stay the course in raising interest rates significantly at a steady pace” and said it intends to hike by another 50 basis points in March.
Chinese share prices dipped owing partly to heightened tensions between the US and China after an alleged Chinese spy balloon was shot down by the US military off the south coast of Carolina. The incident has raised concerns about further sanctions by the US on China. Despite the recent deterioration in diplomatic relations, trade between the two countries reached a record high last year.
* Office for National Statistics