- Big drop in headline UK inflation, but the core CPI number remains stubbornly high.
- The pound rises against the dollar as the bets firm up about fresh rate increase by the BofE.
- US retail sales add to worries that the Federal Reserve’s job in taming inflation is not over.
- Fresh evidence of China’s slowdown, with new home prices falling back in July.
- Aviva posts 8% rise in half-year operating profit with demand soaring for private health insurance amid NHS strikes.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’Inflation appears finally to have taken a big step downwards, which will come as a big sigh of relief amid cost-of-living pain, but underlying prices are staying uncomfortably stubborn. The pound has edged higher against the dollar with the big bets on the Bank of England pushing up interest rates again in September by another 25 basis points to 5.5%, and the high cost of borrowing set to linger.
When you strip out volatile food and fuel prices, which have fallen back more substantially, there has been no slowdown in rate of increases which is highly disappointing. Core CPI flatlined at 6.9% in July, indicating that the headline rate might not budge much more immediately and there are some signs it could even edge back upwards.
We usually spend more on clothing in August due to millions of people heading back to school and work and the appeal of new seasonal ranges. But also the sharp wage rise in June to the highest level since comparable records began more than two decades ago, has led to expectations that consumers will be more flash with their cash – which may mean companies will have less incentive to be competitive and bring down prices.
The prospect of more interest rate rises will take the edge off any relief people who have had to remortgage feel at rising wages. With renters and homeowners facing their monthly costs rising by hundreds of pounds, a small real-term rise in salaries is unlikely to prove much solace. Around 37% of people own their own home outright, so they are much more insulated by the ratcheting up in rates, and are likely to keep the tills ticking over nicely.
FTSE 100 has opened lower as investors assess the impact of higher rates on the prospects for domestically focused firms with borrowing costs set to rise again, while keeping an eye on chillier winds blowing in from around the world. Strong retail sales data in the US has unnerved investors, with the realisation dawning yet again that the Federal Reserve job in calming inflation is not yet done. It’s still set to be a bumpy ride to meet the 2% target, and the concern is that this won’t happen without a significant downturn in the economy.
Worry still reigns about China’s big slowdown after the property market shows further signs of deterioration. Average prices of new homes in China’s big cities fell back in July, after a brief respite in June, showing a monthly decline of 0.2%. It’s fresh evidence that the attempts to prop up the real estate sector by the People’s Bank of China with cuts to key loan rates are barely scratching the surface of the deep problems. As concerns continue to swirl about the health of the world’s second largest economy more pressure is being put on commodity stocks amid expectations of weakening demand for crude, oil metals and minerals. Investors are looking for a lot more welly before being more confident that the economy will be provided with more insulation. Amid the uncertainty the price of Brent Crude has weakened, with a barrel currently trading below $85.
Aviva has posted another strong set of numbers general insurance premiums up 13% in the UK and Ireland, and demand soaring for private health insurance. Sales over the half year increased by 58% as services with more corporate clients and individuals seeking cover. It’s hardly surprising given the tales of woe about backlogs in the NHS and the continued strikes by staff in disputes over pay and conditions. Clearly many more people are willing to pay to have peace of mind that when they do fall ill, support will be available without the worry of walk-outs and waiting lists.’’
