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By Wesleyan

UK inflation remains in double digits

financial planning
3 min
Smartly dressed man looking out of window holding mug

The annual rate of price increases has dipped slightly but remains stubbornly high, meaning that further interest rate rises from the Bank of England are likely this year.

The rate of inflation in the UK has slowed by less than expected, raising the prospect of further rate hikes from the Bank of England. Inflation fell to 10.1% in March, down from 10.4% the previous month. Wage growth shows little sign of moderating, with wages in the three months through to February excluding bonuses increasing by 6.6% compared with a year ago. The unemployment rate rose slightly to 3.8%, up from 3.7% in the previous three months.

Meanwhile, economic activity flatlined in February owing to a wave of public sector strikes that weighed on activity. Despite the poor performance, the UK is expected to avoid a technical recession (which is defined as two consecutive quarters when the economy contracts). With recession fears easing, sterling hit its highest level against the dollar in 10 months.

Cooling US inflation boosts markets

Global financial markets were boosted by the latest sign that US inflation is cooling, raising hopes that the Federal Reserve (Fed) will slow or pause its rate hikes. The annual inflation rate fell to 5% in March from 6% in February, the slowest annual increase in consumer prices since May 2021. The Fed has raised interest rates nine times since March last year, including in March this year when the US banking sector was hit by two of the biggest failures since the financial crisis in 2008.

In the energy sector, oil prices rose to nearly $86 a barrel after Opec+ members agreed to a surprise cut in production, led by Saudi Arabia. This move is likely to reduce the supply of crude by over a million barrels a day, and the share prices of large oil producers rose on the news. Western governments are worried that the decision to prop up oil prices may harm the efforts by central banks to curb inflation.

Signs US economy is slowing

US manufacturing output dipped by 0.5% in April as companies reduced investment plans amid tightening conditions for loans. Americans cut their spending at retail stores and restaurants for the second consecutive month in March, indicating a growing sense of caution among consumers following a surge in spending during January. Notably, the retail sector suffered a 1% decline in sales from February.

This decline is further evidence that the US economy is slowing, as consumers grapple with elevated inflation and higher interest rates. Similarly, the US employment market is showing signs of a slowdown, with 236,000 jobs added in March compared with 326,000 in the previous month. Yet the unemployment rate remains low at 3.5%*. Economists are keeping an eye on banks to see if they pull back on lending in the wake of the collapse of SVB and Signature Bank in March, followed by First Republic in April.

China’s exports surge

There was unexpected positive news from China, as exports surged by nearly 15% in March, driven by sales of electric vehicles and their components. This development is good news for Beijing, as it hopes to meet its growth target of 5% for the year. However, China’s manufacturing sector is still struggling to recover from the pandemic and consumption remains weak.

Chinese property giant Evergrande, which collapsed in 2021 and sparked China’s worst property market crisis on record, unveiled a multi-billion dollar restructuring plan for its massive debts. The group has announced plans for restructuring $20 billion (£16.2 billion) in offshore debt, which could be seen as a model for other struggling developers.

In the euro area, there was a sharp drop in the annual inflation rate, which fell from 8.5% in February to 6.9% in March, indicating that upward pressure on prices is easing. Despite this improving inflation outlook, the European Central Bank is still expected to raise interest rates again in May.

Meanwhile, house prices in the euro area have suffered their first quarterly fall in eight years, dropping 1.5% in the final three months of 2022. The biggest falls were in Denmark and Germany, where prices fell 6.5% and 5% respectively.


* Federal Reserve Bank of St. Louis

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