- UK Consumer Price Inflation was 9.9% in August, down from 10.1% in July.
- The pace of price increases remains uncomfortably high for the Bank of England amid stubborn core inflation
- Pound retreats again to $1.148 amid dollar strength, as steeper interest rate rises are expected in US
- Anxiety grips financial markets as worries about the global slowdown and a US recession rise
- Flight away from risky assets continues, but Ether rises 2% ahead of much hyped ‘Merge’ event
Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown:
‘’There has been a fresh bout of anxiety on financial markets amid worries that inflation is still proving to be a formidable opponent to take down. The UK headline inflation rate has slipped from its highest rate in four decades, as the dip in crude oil prices leads to lower fuel bills but this easing of price pressures for UK consumers hasn’t helped the pound, which retreated back below $1.15 amid a fresh strengthening of the dollar. The expectation is that the Bank of England won’t now push down quite as hard on the monetary brake pedal as the Federal Reserve is forecast to do in terms of rate hikes after the US inflation snapshot came in higher than expected.
The slight drop in UK inflation, the first in 11 months, will ease pressure on give policymakers and give them a bit more breathing space. They will also be assessing the impact of the cap in energy prices which is expected to take some more steam out of the boiling pot of rising prices. But inflation is still uncomfortably high with food and clothing becoming more expensive again and core inflation, stripping out volatile food and energy prices, stubbornly set at a 30 year high of 6.3%. There are still signs of continued upwards pressure on wages amid the fight for talent, and so the Bank of England can’t rest easy. Rates are still expected to head upwards when policymakers meet next week but a lower rise of 0.5% is now looking more likely.
Core inflation is also an increasing concern in the US, given that it rose by 0.6%. That’s led to real worries that inflation is becoming embedded in the US economy and realisation is dawning that the Fed’s job is not done and that a string of bolder moves in terms of monetary policy are ahead. More aggressive rate rises will mark a sharp escalation in borrowing costs, and worries are ratcheting up about the effect this will have on the global economy, as we hurtle away from the era of cheap money. The mighty dollar has strengthened yet again as investors race for a safe haven and this threatens to pile more inflationary pressure onto economies which import commodities priced in dollars. With worries that tighter monetary policy will increase the chances of the US heading into recession, stocks in Wall Street fell sharply, with the tech heavy NASDAQ down by more than 5%, the wider S& P 500 falling by 4%. The FTSE 100, has also opened lower following on from losses in Asia.
Bitcoin is bumping along close to the psychologically important $20,000 mark after dropping like a stone, soon after the US consumer price snapshot was released, mirroring falls in stocks. Crypto assets still highly entwined with the fortunes of the equity markets and given that they are seen as highly risky assets, there has been a flight away from the Crypto Wild West as investors search for less turbulent places to put their money. Ether has rebounded a little after its slide yesterday, ahead of a closely watched change over to a new more environmentally friendly operating model. The switch, which has been hyped as ‘The Merge’ is aimed at making the crypto currency more appealing to speculators who are concerned about the high energy intensive nature of mining. Moving from proof-of-work to ‘proof of stake system is a highly technical process. Instead of miners being more likely to add blocks to the block chain if they generate more computer power, by staking, users are more likely to be randomly selected to add blocks if they lock away more currency. Although the proof of stake system is viewed by some as a way the crypto world can limit its environmental footprint and burn less energy, the expected upgrade hasn’t insulated the currency from the wild swings in price we’ve seen over recent months.’’
