UK inflation concerns grow despite year-on-year decline

• UK inflation brings both optimism and caution
• IMF growth projections highlight protracted wait for US cuts
• US dollar on the rise as inflation concerns persist

European markets have enjoyed a welcome reprieve from the selling pressure that has dominated much of the week, with mainland indices leading the way. A decline across both headline and core inflation in the UK has helped highlight the continued downward trajectory that many hope will soon bring a return to target to facilitate a dovish shift from the Bank of England. Yesterday’s comments from BOE governor Andrew Bailey signalled as much, highlighting the confidence that the UK is on the path to lower rates. Nonetheless today’s 0.6% monthly metric across both core and headline inflation should be cause for concern, replicating the 0.6% gain seen for UK CPI last month. If 2% is the target, a two-month gain of 1.2% does little to encourage the idea that the inflation issue has been largely resolved. In response we have seen markets reprice the first rate cut, with the elevated wage and inflation metrics driving expectations of a June cut down to a mere 29%. Instead, we may have to wait until August (50%) or September (67%) for that first pivot from Bailey & co.

US indices suffered heavy declines yesterday, as Jerome Powell reiterated the view that the Federal Reserve will remain steadfast in their approach to driving down inflation. The relative strength of the US economy was highlighted by IMF projections yesterday, with the 2.7% 2024 growth prediction for the US standing in stark contrast to the tepid outlook for the UK (0.5%) and Germany (0.2%). While many see this as grounds for optimism for US equities, it does little to help those waiting patiently for a rate cut from the FOMC.

The continued strength from the US consumer was highlighted on Monday, with the 4% annual retail sales figure signalling that demand remains strong despite above target inflation. With growth, consumer spending, and inflation remaining strong, the Federal Reserve has little choice other than to maintain rates in the hope that they can take the heat out of the economy. Today’s unemployment claims figure will likely tell a similar story of continued strength in the US economy, with both initial and continuing claims doing little to signal a desperate need for the Fed to take supportive action. With markets on the slide, inflation pressures failing to subside, and the US economy showing no signs of slowing, it comes as little surprise to see the dollar index on track for its fourth consecutive month of gains.