ALEX BRUMMER: Inflation in the headlights

UK inflation data from March (expected Wednesday) and subsequent releases this spring will largely determine the performance of the economy this year.

The hope is that the February data, which showed a surprise increase to 10.4 percent, was an aberration.

It is especially unbalanced with US consumer prices coming down with a jolt, falling as much as 5 percent over the past month.

At a time of renewed public sector strikes, particularly against the NHS and patients, a drop in overall prices would be useful to both isolate union demands and moderate the pay agencies’ recommendations for 2023. Chancellor Jeremy Hunt spoke forcefully in Washington about his fears that high public sector prices could create a doomsday cycle for the economy and eventually starve public services.

The Bank of England has changed its approach to inflation and interest rates.

The Bank has halted forward guidance and will make its next decision on ‘evidence’.

The consumer price and labor market reports in March, along with the latest surveys, will play a crucial role.

Tesco’s price drop of 10 pence for half a liter of milk, which Sainsbury’s follows, is seen as a practical step in the right direction! The Bank has been working on increases in food prices, but no hard evidence of ‘greed’ has been found. What is more certain is that throughout the post-Covid period, the major global food groups, such as Kraft Heinz and Nestle, have valued investors over customers by putting generous profit margins above all else.

Both the Chancellor and the bank are waiting for the energy price shock to subside from consumer prices. Backlogs in the energy market, which arise from the hedging of (price insurance) contracts, are decreasing. Wholesale gas prices are currently 30 percent lower than before the war against Ukraine.

Mathematically, lower energy costs, possibly supported by lower food prices, could lead to a 5 percentage point reduction in consumer prices by late spring.

So where does this leave interest rates? The impression is that the Bank of England would welcome the chance to pause interest rates.

But there is a concern that there won’t be enough improvement based on the March data.

The Chancellor’s budget measures to liberalize the labor market, through childcare and pension reforms, will be a slow burn.

Those reforms have seldom received support from the International Monetary Fund, which has praised the March budget. It now says the UK’s reputation for economic management has been ‘unequivocally’ restored following the interplay between Liz Truss and Kwarteng.

It is clear that the Bank will be concerned that the turmoil in the banking sector will lead to a tightening of credit conditions as lenders become more cautious about lending.

Another rate hike, along with quantitative tightening (withdrawing money from the economy), could provide an unnecessary drag on a flattening economy in which real incomes are squeezed by high prices.

It is fascinating to see that here in the US, with the inflation bogeyman showing signs of coming under control, there is a major political battle going on over the role of the Federal Reserve in both causing and fighting higher prices. .

Republican presidential nominee Ron DeSantis, governor of Florida, accuses the US central bank of contributing to inflation by “printing trillions and trillions of dollars.” He accuses the Fed of being too aggressive in cutting interest rates at the time, causing unrest in the banking sector.

The Wall Street Journal, among others, is sympathetic to DeSantis’ view that loose monetary policy, together with Joe Biden’s succession of hefty spending packages, are the fundamental causes of US inflation. Of the advanced countries, it is only in the US, where so many citizens are shareholders, that central bank policy reaches the heart of the political debate.

Andrew Bailey can thank his lucky stars that the role of an independent Bank of England has not been politicized so far.

payback period

Not all US banks are suffering from the current financial turmoil.

JP Morgan Chase is one of the big beasts benefiting from a flight to quality after the collapse of Signature and Silicon Valley Bank. In the first quarter of 2023, the profits of the biggest beast Wall Street rose 52 percent to $ 12.62 billion. Chairman Jamie Dimon modestly describes his bank as a ‘pillar of strength’ in the midst of turmoil. Hard to disagree.