In contrast to stubbornly high inflation in the UK, the pace of price rises has slowed in the US, which helped to propel stockmarkets higher in May.
Bond prices fell after higher-than-expected inflation figures stoked fears that the Bank of England (BoE) could raise interest rates again. Britain’s high rate of inflation is finally beginning to ease, falling from 10.1% in March to 8.7% in April. However, core inflation, which removes energy and food costs, came in at 6.8%, up from 6.2% in March. Core inflation is a measure closely monitored by the BoE when making decisions about interest rates.
The BoE has been raising rates to try to bring inflation under control. As expected, policymakers hiked interest rates by a quarter of a percentage point to 4.5% in May – the twelfth consecutive rise since December 2021 and the highest in almost 15 years. Rates were thought to have peaked, but markets now expect the base rate to reach 5.5% by November.
While the pace of prices is slowing, food price inflation remains stubbornly persistent at a near 45-year high of 19.1%*. The soaring cost of essentials has added further pressure on households already dealing with high energy bills amid the cost of living crisis. Prime Minister Rishi Sunak has urged supermarkets to introduce price caps on basic food items.
The UK labour market shows signs of cooling, with the number of payrolled employees falling by 136,000 in April. Wage growth continued to climb. Average private sector earnings were 7% higher than a year earlier, while growth in public sector earnings reached a 20-year high of 5.6%.
US debt ceiling deal within reach
US stocks rallied on hopes that US politicians are close to completing a deal to raise the debt ceiling, which would benefit globally diversified portfolios with exposure to this region. The government borrows money for important expenses like social security and Medicare, and reached its current limit of $31.4 trillion in January. However, Republicans, who hold the majority in the House of Representatives, had refused to raise it unless President Biden and the Democrats agreed to spending cuts.
Inflation came in lower than expected, bolstering hopes that the US Federal Reserve (Fed) will pause interest rate hikes. The consumer price index rose at an annual rate of 4.9% in April, down from 5% in March. While inflation has fallen sharply since hitting a 40-year high last June, prices are still well above the Fed’s target of 2%.
Despite the worst banking turmoil seen since the financial crisis, the Fed raised interest rates for the tenth time in a row. The central bank increased its benchmark interest rate in May by a quarter percentage point to between 5% and 5.25% – the highest interest rates have been in 16 years.
The US economy slowed sharply in the first quarter as businesses reduced investments in response to higher borrowing costs. Growth in the first three months was 1.1%, down from 2.6% in the previous quarter. The US economy beat forecasts with 253,000 new jobs in April, while the unemployment rate fell slightly to 3.4%.
US bank First Republic’s assets were taken over by J.P. Morgan Chase after it became the third American bank to collapse this year. Conditions in the banking sector have stabilised, but the risks of further turmoil remains.
Germany slides into recession
European stock markets dipped after data revealed the German economy had entered a recession. In the first quarter, German GDP unexpectedly contracted by 0.3%, following a 0.5% decline in the previous quarter. The impact of last year’s energy price shock and subsequent inflation have weighed heavily on Germany’s economy, resulting in reduced consumer spending.
The European Central Bank raised interest rates by 0.25 percentage points to 3.25% in May. This is the seventh consecutive rise since 2022 and was smaller than previous increases, suggesting borrowing costs are nearing their peak. Policymakers have hinted that the ECB may need to raise interest rates to a higher level and for longer than has been previously forecast.
China’s rebound may be slowing
China’s economy had a strong beginning to the year as consumer spending surged after the relaxation of pandemic-related restrictions. In the first quarter, GDP grew by 4.5% compared with the same period last year, the fastest growth rate in 12 months. Moreover, retail sales soared by 18.4% in April, surpassing the 10.6% increase seen in March.
However, China encountered a slower-than-expected growth in exports during April, coupled with a decline in imports, raising concerns about the pace of the country’s economic rebound after the removal of pandemic restrictions. Exports in April climbed by 8.5% compared with the previous year, while imports experienced a year-on-year decrease of 7.9%.
* Office for National Statistics