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| | Hi Friend, "Proof The Plan Is Working" ...
Mixed news for policy makers in the inflation data this week. Inflation CPI basis eased to 2.3% in April, down from 3.2% in March and well below the peak for this cycle of 11.1% in October 2022.
Rishi Sunak said: "Today marks a major moment for the economy, with inflation back to normal. This is proof that the plan is working. The difficult decisions we have taken are paying off."
He could have added ... "From here it could get worse, one of the main reasons I made the election call, I'm off".
Markets were disappointed. Analysts had expected a drop to 2.1%, closer to the Bank of England target of 2.0%. Disappointed but not unduly troubled. Ten year bond yields increased by 12 basis points, closing at 4.25. Sterling ended the week unchanged at $1.27.
Further analysis of inflation data, would only cause "further" disappointment. Goods inflation, fell to -0.8%. The goods figure was flattered by a further fall in energy costs. Ofgem lowered the cap on average annual household energy bills by 12 per cent in the month, leading to a fall in energy costs of minus 27%.
Service sector inflation eased to just 5.9% from 6.0% prior month. Insurance, health care, restaurants and hotels prices were particularly high. Treasure that no claims bonus, transport insurance costs were up by 24%.
Underlying inflation excluding energy, food and booze, eased to 3.9%. The arithmetic mean CPI number for the month was 2.5%, significantly above the Bank's 2.0% target.
Grant Fitzner, chief economist at the ONS, said: "There was another large fall in annual inflation led by lower electricity and gas prices." Read "Prices are falling gangbusters."
"Tobacco prices also pull down the rate, with no duty changes announced in the budget. Food price inflation saw further falls over the year." [The rate of food inflation eased to 2.8%.]
Manufacturing output prices increased by 1.1% in April, up from an average 0.3% in the first quarter. Manufacturing input costs were lower by -1.6% in April, compared to -2.7% in the first three months of the year. Still no retail price pressure but evidence of a turning point perhaps.
Oil prices Brent Crude averaged $89.90 dollars in April this year, compared to $84.60 dollars last year. A plus 6% inflation impact Sterling adjusted.
Money Supply M4, for some a leading indicator of inflation, bottomed out in September and October last year, with the latest data in March completing a reverse head and shoulders formation.
The pattern suggests prices are set to rise towards the end of this year, in line with the Bank's own expectations. CPI inflation is expected to end the year at around 2.5%.
So What of Rates ?
The Bank of England will be concerned by the stubborn performance in service sector inflation, sticky earnings data and the moderate drop in underlying inflation.
According to The Times, Tomasz Wieladek, chief European economist at T Rowe Price, said: "Although there is some evidence that services inflation is falling gradually, the data today will likely prevent a cut in June."
Paul Dales, chief UK economist at Capital Economics, said: "It feels as though a cut in June now seems very unlikely. Even a cut in August is looking a bit more doubtful."
The IMF this week suggested three rate cuts are possible in the UK this year. As we said last week, June [22nd] may just be a bit too soon. No meeting in July, the next MPC meeting after that, is the 3rd August.
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| | | Why Call An Election Now ... Many Have Asked ...
The Prime Minister made his announcement outside Number Ten in the rain, as the Labour promise of "Things Can Only Get Better" played in background. "Things can only get wetter" the pun but for Rishi Sunak, from here it could only get worse.
Inflation figures will rise before the end of the year, along with the unemployment rate and the numbers out of work. If the April borrowing figures are anything to go by, the OBR forecasts for the current financial year will be widely exceeded.
Growth in the first quarter suggested the economy was up by just 0.2% year on year. For the year as a whole the IMF growth upgrade to 0.7% may be something of a challenge.
The IMF has warned there is no money for a further cuts in taxes and National Insurance rates. A series of big spending commitments already announced, including an uplift in defence spending, a large compensation package for victims of infected blood and the Post Office scandal, imply there's nothing left for tax cuts in an autumn budget anyway.
Despite the IMF suggestion, there could be three interest rate cuts this year, the markets are beginning to think there may be just one.
The immigration figures could get better, especially if student numbers for higher education are radically cut. The small boats keep coming. The Rwanda flights are still up in the air but not literally.
The latest YouGov polling for The Times shows the Tories over twenty points behind in the polls, with no evidence the position is improving. Labour is on track for a 200 plus majority in the House.
Tory MPs have decided in record numbers, enough is enough. The number of Tory MPs standing down at the general election (76) has now surpassed the prior Conservative Party record of 75. A record set in 1997 when Tony Blair won the Labour landslide.
There is a question over Sunak's appetite for hanging on. Few can believe he is attempting to pull off a turnaround that would be truly unique in modern political history. July isn't a great month to poll. The last July election in the UK was in 1945. The result then was a significant Labour victory. So what is he up to?
Sunak's decision to call a summer election is seen as a bold and risky move, reminiscent of past political gambles. Or is it?
Earlier this year he was said to cut an increasingly dejected figure, frustrated that voters were not responding to his carefully orchestrated announcements and plans for the smoking ban and maths for all.
While he has been more "chipper' in recent weeks, those close to him have suggested that holding out for longer would become an exercise in endurance and survival. The Post Master General for the Back Bench Committee is thinking of making daily deliveries of letters of no confidence.
The Prime Minister has had enough. One look at the Rich List must have pushed him into the decision. The Out of Office option looms. It ain't that bad.
Former Chancellor Nadhim Zahawi has just been named as the new chair of The Very Group this month. Dominic Raab has taken on a new role as Senior Strategic Adviser, at private equity firm Appian Capital.
For someone else the challenge of NHS waiting lists, stopping the boats and flying to Africa. Sue Gray, Keir Starmer's chief of staff, has drawn up a list of potential crises that could trip up a Labour government.
The collapse of Thames Water, overcrowding in prisons, universities going under, failing local councils and an NHS funding shortfall included. Not to mention a difficult public sector pay round. They all feature on a Labour Government risk list.
But come to think of it, that's probably on the Tory risk list too ... fourteen more years? No thanks ...
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| That's all for now. Have a great weekend break ...
John
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| To understand the markets, you have to understand the economics ...
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References UK inflation falls to 2.3% - pointing to August interest rate cut : The Times
ONS: Producer price inflation, UK: April 2024
ONS: Consumer price inflation, UK: April 2024 |
| © 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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