Latest Inflation and Interest Rate News This Week

United Kingdom

• Yesterday, the Office for National Statistics (ONS) confirmed UK Consumer Prices Index (CPI) inflation fell to 6.7% pa in August from 6.8% pa in July.  This was a surprise fall given that oil prices are increasing again due to Russia and Saudi Arabia cutting production on an assumption that global economies are slowing down.  Meanwhile, the old measure of inflation RPI (Retail prices index that is a simple mean rather than geometric mean average price, including the costs of property) increased from 9% pa in July to 9.1% in August.  The main contributor to this increase was transport costs with a knock-on effect to food costs.
• Today, the Bank of England reacted by deciding to keep the central bank interest rate at 5.25% pa.  We find this surprising, but our best guess is that the Bank of England is already expecting a recession anyway.

United States

• Yesterday, the Federal Reserve decided to keep the central bank interest rate with a range of 5.25% to 5.50%pa.  Again, the Fed suggests that inflation is going to remain higher with the current higher interest rate period to remain in place for some time.  This set stock markets falling in the US but again, perhaps this is by design as the Fed needs an economic slowdown or recession anyway.

Europe

• The European Central Bank is forecasting higher inflation in the short term will oil price increases and last week increased interest rates to an all time (since the Euro started) to 4% pa.  the EU economic powerhouse, Germany is already in recession and expected to be the worst economic performer of all G7 nations and the UK has already overtaken France in factory output.  France and German stock markets tumbled but there is ‘light at the end of the tunnel’ with the ECB forecasting inflation to fall to between 2-3% pa next year.
• The ECB did signal this is the end of its interest rate increases although they may not fall back that quickly.

Comment

We have been forecasting for a long time that 2023 would be a volatile year and we expect this to continue.  We have also forecast that things will start to settle in 2024 but we do not expect this to happen quickly, and we do not expect rates to fall to 2% pa or lower.  We suggest central bank rates and economies will return to trend inflation between 2-3% pa and central bank interest rates to 3-4% pa (normal economic conditions for the last 20 years before the Credit Crunch Crisis of 2008/9).