With the pace of inflation falling around the world, central banks may be nearing the peak of their interest rate rises.
UK government bonds experienced a surge in price as inflation declined to its lowest level in 16 months. The annual pace of price rises dropped by more than expected to 7.9% in June, down from 8.7% in May. Core inflation also fell from a 31-year high of 7.1% in May to 6.9%. Food inflation is still worryingly high at 14.9% compared with 16.5% in June.
UK house prices fell at their fastest pace since 2011 in June, with the property market showing strain in the face of rising mortgage costs. Prices dropped by 2.6% compared with last year, wiping around £7,500 off the average UK property*. Wages grew faster than expected in the three months to May at 7.3% compared with the previous year, raising concerns that inflation could remain elevated for a prolonged period. The economy contracted 0.1% in May, after growth of 0.2% the previous month. Economists were expecting a contraction of 0.3%.
US inflation falls but rates rise
US stock markets gave a mixed performance after the Federal Reserve (Fed) raised its benchmark lending rate by a quarter percentage point in an effort to stabilise prices. This decision brought the benchmark rate to a range of 5.25% to 5.5%, which is the highest level in 22 years. It marks the eleventh rate increase since the Fed began raising rates in March 2022, following a one-month pause to assess the state of the economy. Fed chair Jerome Powell suggested the central bank could raise rates again at the next meeting in September if the data justifies the decision.
US inflation has now fallen for 12 straight months and was 3.0% annually in June, down from 4.0% in May. This is the lowest level in over two years, and a significant drop from the 9.1% recorded last June. However, core inflation, which excludes volatile food and energy costs, remains high at 4.8%, down from 5.3% in May.
Despite the Fed’s efforts to combat inflation, the US economy remains robust. In June, the US added 209,000 new jobs, indicating a slowdown in hiring compared from the previous month’s addition of 309,000 jobs. The unemployment rate decreased slightly from 3.7% in May to 3.6% in June. America’s economy expanded at a much faster pace in the first three months of the year than previously estimated. GDP rose by 2% in the first quarter, up from the second estimate of 1.3%.
Europe’s economy is slowing
The European Central Bank (ECB) raised its benchmark deposit rate by 0.25 percentage points, reaching a record high of 3.75%. Euro area inflation declined from 6.1% in May to 5.5% in June, the lowest rate since the beginning of the previous year. Meanwhile, core inflation increased slightly from 5.3% in May to 5.4% in June.
Business growth across the region has stalled recently due to a deepening manufacturing recession, posing a challenge for the ECB in its fight against inflation. Additionally, Germany’s economy faced another a setback after the influential IFO institute reported a second consecutive month of declining business sector confidence in June. Germany slipped into recession after its economy shrank by 0.5% in the final quarter of 2022 and by a further 0.3% in the first quarter of 2023.
China announces stimulus measures
Chinese stocks were lifted after Beijing pledged support to boost its economic recovery, which has been losing momentum. Authorities announced measures to reassure private and foreign investors after growth was slower than expected following the lifting of pandemic restrictions. China’s second-quarter GDP growth rate fell below expectations at 6.3% from a year ago, with falling exports, weak retail sales and slowing property sector weighing down on activity.
Exports contracted at the fastest pace since the start of the Covid-19 pandemic in June. Retail and property sales have also declined, and the unemployment rate among young people is on the rise. China is also tightening controls over exports of two key materials used to make computer chips, sparking fears of a new trade war with the US. It comes after Washington’s efforts to limit sales of advanced microprocessors to China. China says that while its semiconductor output rose up in June, it was still down in first half of year.
* Halifax house price index, IHS Markit