Beyond The Peak: How Has The Inflation Crisis Shaped The UK Economy?

Economic

Summary:

UK inflation data due on Wednesday is expected to fall close to the government’s 2% target. Almost three years on from the start of price spikes, how has the economy changed?

After a long, gruelling wait, markets and policy makers are expecting the UK's Office for National Statistics to deliver good news this week.

For the first time since July 2021, experts hope the country's inflation rate will return below - or close to - the state's target of 2%.

Such a result would signal the end of a prolonged price crisis, which peaked with rates at 11.1% in October 2022, a 40-year high.

Now, as costs cool, the UK's Resolution Foundation has examined the legacy of the cost of living crisis. Euronews Business breaks it down.

UK hit hard compared to peers

One key driver of Europe's inflationary spike was the pandemic. As economies emerged from a series of lockdowns in 2021, the demand for goods surged, yet Covid-linked disruptions meant that supply fell behind demand. Due to this imbalance, prices shot upwards, aggravated by lockdown-induced stimulus measures.

A year later, Europe received another blow. Following Vladimir Putin's invasion of Ukraine, several countries were forced to wean themselves off Russian gas, driving up fuel costs due to a scarcity of supply.

While price shocks, therefore, were not unique to the UK, the Resolution Foundation has claimed that the UK was particularly affected.

"The increase in the UK consumer-price level has been by far the largest in the G7, and larger than all but two of the 23 rich countries for which the OECD produces comparable data," reported the Think Tank.

The change in consumer price inflation over the last three years was only higher in Iceland (25%), when comparing the UK with OECD advanced economies.

Sweden, like the UK, has noted a change of 22% since March 2021.

Lower-income households struggled the most

The inflation surge in the UK disproportionately affected the relative cost of essentials, particularly energy and food, said the Resolution Foundation.

As a result, the poorest households were hit the hardest by price spikes, as they tend to spend a larger portion of their budget on these goods.

When it comes to earnings, however, the think tank argued that lower-paid workers were less affected than high earners.

Due to rising prices, many employees found that they were taking a real wage cut even if their nominal salaries were kept constant.

For those on low salaries, pay was more likely to rise in line with prices because of minimum wage requirements, along with tougher hiring conditions among lower-paying jobs.

Brits saved more than US households

The Resolution Foundation also found that, instead of draining savings to support their lifestyle habits, UK households reacted to price surges by reducing spending.

The rate at which individuals were buying goods actually fell more sharply than wages, the group claimed.

“Households have actually saved £54 billion more (and consumed £54 billion less) in 2023 than if saving had returned to its 2019 rate," said the report.

By comparison, this isn't the case in the US, where real consumption per head is around 8% above its pre-pandemic level.

Government debt not saved by inflation

Historically, we've seen that state debt levels can be brought down because of rising prices.

One reason for this is that, if individuals are given a pay rise to match price increases, state tax revenues are likely to increase.

Added to this, inflation can erode the real cost of outstanding government debt.

As prices rise, the nominal value of loans will remain the same, meaning that their real value decreases.

That said, in the case of the latest inflationary spike, the Resolution Foundation has found that the opposite was true.

This is partially because economic growth has been disappointing in the UK over the past three years, and also because of expensive state measures to support households through the cost of living crisis.

On top of this, the UK holds a significant amount of inflation-linked debt, which increases in value along with rising prices.

Although inflation is now cooling, the Resolution Foundation notes that the effects are likely to remain.

Prices in the UK are now approximately 15% higher, according to the group, than they would have been had inflation consistently remained at 2%.

Looking ahead, OBR forecasts imply that GDP will be around 2% lower by the end of next year than was expected before the cost of living crisis.

That's equal to around a £1,900 per household hit to GDP in today's prices.

Source：euronews

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Samantha Luan

Economic

Central Bank

Forex

Markets

Markets took a slow start to the new trading week. An empty eco calendar facilitated the status quo. Cleveland Fed Mester said that inflation risks moved up in Q1 while the economy was a little bit stronger than anticipated. Given that she wasn't on the median path (3 rate cuts) in March, she might back only one at the June meeting. The relevance is low though given that she'll retire at the end of June.

Core bond yields moved a little further away from last week's tested support levels, but the move lacked momentum. US Treasuries slightly underperformed German Bunds with daily yield increases varying up to +2.5 bps in the US and +1.5 bps in Europe. Similar story for the dollar which closed marginally stronger at 104.56 (DXY) and 1.0857 (EUR/USD). US stock markets showed a diverging pattern near all-time highs with the Dow Jones correcting 0.5%, S&P 500 unchanged and Nasdaq still gaining 0.65%.

Eco releases remain second tier today, but the number of central bank speakers increases with especially Fed Waller discussing the US economy. Waller was one of the first and most prominent (rumoured candidate as next Fed chair) Fed-members to talk out in favour of keeping rates higher for longer. His February “what's the rush” and March “there's still no rush” speeches are testament to his views and together with hotter CPI prints kick-started this year's Treasury sell-off.

His views are a good indication (and potential market mover) on how the dots might shift at the June policy meeting given his standing a “leader” of the large minority camp (9/19) which suggested only a maximum of two policy rate cuts in 2024 at the March meeting. Bank of England Chair Bailey speaks as well which could influence the probability of a first rate cut at the next, June, meeting (currently 50% probability).

The eco calendar heats up later this week with May UK CPI data and FOMC Minutes tomorrow, global PMI surveys (May) and the outcome of Q1 negotiated wage data (EMU) on Thursday and finally UK retail sales (May) and US durable goods orders (April) on Friday.

News & Views

Czech National Bank (CNB) MPC member Tomas Holub indicated that he still considers it too early to already decide whether the pace of CNB rate cuts should be slowed from 50 bps at the previous three meetings to 25 bps at the June meeting. Holub first wants to see the May inflation data that are published before the June 27 meeting. Inflation unexpectedly jumped from 2% to 2.9% in April, but this was mainly due to a rise in volatile food prices.

Aside from the development in headline in inflation, Holub also said he keeps a close eye on the development of Czech krone. Regarding domestic developments, he mentions wages as a key variable. Faster than expected wage rises could be an argument to slow the pace of rate cuts. Looking forward, Holub indicated that a Czech policy rate of 4.5% or slightly lower is realistic for end this year (currently 5.25%).

Minutes of the May 6-7 meeting of the Reserve Bank of Australia learnt that the RBA kept its policy rate unchanged at 4.35% as it wanted to avoid excessive fine tuning. The central bank's economic scenario still sees inflation returning to the 2-3% target by late 2025 as consumption is expected to moderate. Even so, the RBA acknowledged, while still balanced currently, recent information showed that risks around inflation had risen somewhat.

In this context, it is difficult for the RBA to either rule in or rule out a future change in the cash target rate. At the same time, the board showed limited tolerance for inflation to return to the 2-3% target later than 2026. If assumptions on the pace of the deceleration in inflation risk to be overly optimistic, a rate hike still can be considered again. Amongst others, a scenario of consumer spending picking up somewhat more rapidly due to strength in the labour market and better growth in public demand and business investment might all cause inflation to return to the target later than currently hoped for. Markets currently only see about a 50% chance of a first inaugural rate cut at the end of this year. AUD/USD eases slightly this morning to 0.666.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed's higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

Number of Central Bank Speakers Increases_1

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed's Powell left the door open for rate cuts later this year. Soft US ISM's and weaker than expected payrolls supported markets' hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

Number of Central Bank Speakers Increases_2

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

Number of Central Bank Speakers Increases_3

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling's downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 – 0.8768 trading range serving as the first real technical reference.

Number of Central Bank Speakers Increases_4

Source: KBC Bank

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FastBull Featured

Data Interpretation

The Federal Statistical Office of Germany published the Producer Price Index (PPI) data for April on May 21, local time.

Germany's PPI declined by 3.3% in April from a year earlier, and it was expected to decrease by 3.1%. In March, the year-on-year change rate was -2.9%.

Germany's PPI was up 0.2% in April from a month ago, lower than the expected 0.3%. In March, the month-on-month reading was 0.2%.

Energy prices fell by 8.2% in April from a year ago and by 0.1% from a month earlier. Lower prices for natural gas and electricity had the biggest influence on the year-on-year rate of change for energy. Gas prices declined by 18.0% from April 2023 and electricity cost 14.0% less in April 2024 than in April 2023. Excluding energy prices, producer prices were 0.6% lower than in April 2023 and 0.3% higher than in March 2024.

Intermediate goods prices were 3.1% lower in April 2024 than a year earlier and 0.3% higher than a month ago. The year-on-year decline in prices was mainly due to the lower prices for paper, paperboard, and paper products. The prices of paper, paperboard, and paper products were down 7.7% from April 2023 and were up 0.9% from the previous month. In addition, prices of basic chemicals and metals also fell significantly year-on-year. By contrast, year-on-year price increases were observed for products for construction purposes.

Capital goods prices rose by 2.4% year on year and by 0.2% compared with the previous month. Non-durable consumer goods were 0.3% more expensive than in April 2023 and up 0.4% from the previous month. Food prices in April 2024 were down 0.4% from April 2023 and up 0.5% from a month ago. Durable consumer goods were 1.0% more expensive than a year ago and 0.1% more expensive than a month ago.

Lower energy prices continued to be the main reason for the year-on-year decline in producer prices, and intermediate goods were the second contributor. Higher prices had to be paid for consumer and capital goods.

This is the 10th consecutive month of decline in the German PPI, indicating that the disinflationary process continues, setting the foundation for the European Central Bank to cut interest rates in June.

German PPI for April

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Alex

Economic

Stocks

The Nasdaq surged to new records, but other markets stagnated as key members of the Federal Reserve cautioned that it was still too soon to discuss rate cuts.

The Nasdaq, a flagship stock index of the technology sector, reached a historic milestone this Monday, May 20, 2024, primarily driven by the stellar performance of Nvidia Corp. stocks.

This achievement stood out among the three major stock indexes in the United States as investors weighed the statements issued by the Federal Reserve in response to signals of possible cooling in inflation.

Fed Speakers Cool Rate Cut Bets: XS.com_1

Federal Reserve officials expressed concerns about inflation control and possibly reducing interest rates as a corrective measure. Philip Jefferson, vice chairman of the Fed, cautioned that it is too early to assert with certainty a lasting slowdown in inflation.

At the same time, Michael Barr emphasised that more time is needed to evaluate the effectiveness of restrictive policies.

The S&P 500 remained relatively stagnant, without significant changes, reflecting widespread caution in the market. On the other hand, the Dow Jones suffered a drop below the 40,000-point mark, closing in the 39,100.00 point range, representing a decrease of over 0.50%. These movements indicate growing concerns among investors about short-term economic stability.

Meanwhile, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, pointed out that an extended period will be required before a sustainable declining trend in price growth can be trusted.

The notable performance of the Nasdaq, which recorded an increase of over 0.65%, reaching 18,675.00 points, contrasts with the widespread uncertainty prevailing in financial markets.

This optimism in the technology sector could be interpreted as a long-term bet on innovation and future growth despite immediate concerns about inflation and monetary policies.

In summary, the recent evolution of the stock markets reflects the complex interaction between economic factors and monetary policy decisions.

While the Nasdaq reached a historic high driven by the technology sector, persistent caution from the Federal Reserve and concerns about inflation have generated volatility in other indexes, such as the S&P 500 and the Dow Jones. In this context, investors must remain attentive to economic signals and policy decisions while carefully evaluating their short and long-term investment strategies.

Source: Pound Sterling

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Cohen

Economic

Commodity

Brent crude futures fell 57 cents, or 0.68%, to $83.14 a barrel by 0613 GMT. U.S. West Texas Intermediate crude (WTI) slipped 58 cents, or 0.73%, to $79.22 a barrel.

Both benchmarks fell less than 1% on Monday as U.S. Federal Reserve officials said they were awaiting more signs of slowing inflation before considering interest rate cuts.

"Fears of weaker demand led to selling as the prospect of Fed rate cut became more distant," said analyst Toshitaka Tazawa at Fujitomi Securities.

Fed Vice Chair Philip Jefferson said on Monday it was too early to tell whether the inflation slowdown is "long lasting," while Vice Chair Michael Barr said restrictive policy needs more time. Atlanta Fed President Raphael Bostic said it will "take a while" for the central bank to be confident that a price growth slowdown is sustainable.

All in all, the Fed officials' comments pointed to interest rates staying higher for longer than markets expect. That has implications for the oil market as higher borrowing costs tie up funds in a blow to economic growth and demand for crude.

On the other hand, the market appeared little affected by political uncertainty in two major oil-producing countries.

"While there has been an upmove over some uncertainty in Iran, prices have since pared back some gains, as investors price for the status-quo in terms of policies for now and that any wider regional conflict remains off the table," IG market strategist Yeap Jun Rong said in an email to Reuters.

Iranian President Ebrahim Raisi, a hardliner and potential successor to Supreme Leader Ayatollah Ali Khamenei, was killed in a helicopter crash on Sunday. Separately, Saudi Arabia's Crown Prince Mohammed Bin Salman deferred a trip to Japan because of the health of his father, the king.

"The death of the Iranian President and the Saudi king's health issue don't seem to be affecting the market much, as it is unclear whether they will have an immediate impact on energy policy," Fujitomi's Tazawa said.

Investors are focusing on supply from the Organization of the Petroleum Exporting Countries and its affiliates, together known as OPEC+. They are scheduled to meet on June 1 to set output policy, including whether to extend some members' 2.2 million barrels per day of voluntary cuts.

"Prices remain in wait for a catalyst to drive a breakout of the current range, with eyes still on any geopolitical developments, along with oil inventories data this week," IG's Yeap said.

OPEC+ could extend some voluntary output cuts if demand fails to pick up, people with knowledge of the matter previously told Reuters.

Source：Reuters

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Warren Takunda

Cryptocurrency

Bitcoin notched all-time highs in several countries across Asia and South America following a 7% surge on the day — pushing the cryptocurrency ever closer to its United States dollar peak.

Bitcoin prices hit an intraday and six-week high of $71,650 on May 21, following a gain of more than 7% over the past 24 hours.

The asset has returned to within 3.4% of its March 14 all-time high in U.S. dollar terms of $73,738, according to CoinGecko.

However, the big move pushed Bitcoin to new peaks against several other fiat currencies.

According to CoinMarketCap, in Japan, BTC hit an all-time high of 11.2 million yen in early trading on May 21.

It is the first time the asset has been worth more than 11 million yen. The local currency has weakened against the U.S. dollar in recent months, losing 10% against the greenback since January. Bitcoin Hits Record in Japan, Argentina and Philippines' Local Currency_1

Bitcoin Hits Record in Japan, Argentina and Philippines' Local Currency_1

BTC/JPY one year. Source: CoinMarketCap

Bitcoin prices also peaked in Argentina when the asset tapped 63.8 million Argentine pesos on May 21, slightly higher than the March high.

The South American nation has been battling inflation — currently at a whopping 290% — and currency devaluation in recent years.

Similarly, 1 Bitcoin was briefly worth a record 4.18 million pesos in the Philippines on May 21, beating mid-March highs.

Other nations where BTC prices have equaled or come very close to their mid-March peak prices include Britain, Australia, Canada, Chile, Colombia, Egypt, Israel, Norway, India, South Korea, Taiwan and Turkey, as noted by industry observer Thomas Fahrer on X.

Hours earlier, crypto analyst Willy Woo observed that a month’s worth of Bitcoin short position buildup was just liquidated.

“One more layer to go in order to short-squeeze past all-time highs,” he added.

Source: Willy Woo

Meanwhile, Coinglass reported that over the past 24 hours, 79,010 traders were liquidated, with total crypto liquidations at $345 million and 78.5% being short positions.

In a market update earlier this week, 10x Research’s head of research, Markus Thielen, predicted a “breakthrough above $67,500 could potentially lead to new all-time highs.”

BTC is trading at $70,945 at the time of writing, just $2,500 shy of a new all-time high in U.S. dollars.

Source: Cointelegraph

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Kevin Du

Economic

Central Bank

The benchmark 10-year yield hovered at about 4.43% at 2:45 p.m. in New York. A wave of selling in the futures market helped accelerate the slump early in the session, with 20,000 10-year note futures changing hands in a three-minute window around 8:20 a.m. Losses were pared through the day, yet yields across all maturities remained higher by about 1 basis point.

With no economic data to spur positioning on Monday, investors are instead focused on commentary from a swath of Federal Reserve speakers, and a packed slate of investment-grade issuance as companies look to borrow ahead of the upcoming holiday weekend. Cleveland Fed President Loretta Mester said on Monday during an interview with Bloomberg Television that policy is restrictive, but US central bank officials needed to wait for more evidence about the path of inflation before adjusting interest rates.

A US inflation report last week helped fuel a third week of gains for the Treasuries market on expectations that easing price pressures will allow the Federal Reserve to lower interest rates twice this year.

“It looks like corporate issuance is heating up a bit this morning, which could be weighing on the market more broadly from a technical perspective,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. We've seen “some selling activity in the futures market amid a light economic calendar, but heavy slate of Fed speakers.”

Federal Reserve Vice Chair for Supervision Michael Barr said the central bank should hold interest rates steady, while Atlanta Fed President Raphael Bostic said the “steady state” for US interest rates will probably be higher going forward than in the recent past.

Fed Vice Chair Philip Jefferson said on Monday regarding the recent consumer price release that it was “important not to focus too much on just one data point,” and “it's too early to know whether that is indicative of what is to come, but it is a good sign for us.”

Traders are currently pricing in about 40 basis points of cuts by the end of the year, with the first reduction fully priced in for November.

The Fed's Mester also said she didn't think three rate cuts in 2024 was still appropriate. In Fed officials last round of quarterly rate projections, known as the dot plot, released in March the median level signaled three quarter-point interest cuts this year. Officials will update those projections in June at the wrap of the central bank's policy meeting that month on the 12th.

But there are signs of new bets against Treasuries being established in the futures market. Activity in two- and five-year note futures has jumped, consistent with new short positioning as traders push back on Fed rate-cut pricing.

Meanwhile, some 13 potential borrowers may look to tap the US investment-grade primary market Monday, according to an informal survey of debt underwriters. Companies are expected to sell between $25 billion to $30 billion of debt, with the issuance likely coming early in the week.

Following the data reports and movement in yields last week, strategists at JPMorgan Chase & Co. hold a “neutral” view on duration, with the firm's economists seeing the first Fed rate cut coming in July.

“We continue to see the risk that the first cut comes later than our baseline forecast,” a team of JPMorgan strategists including Phoebe White wrote in a May 17 note. “In turn, this suggests it is still too early to add duration, as yields have tended to decline in the 3 to 5 months ahead of the first ease.”