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This week

With record domestic inflation data being released this week, presented against a backdrop of severe heat and droughts, investors must have been left contemplating both real and rural returns as warnings over food supply were also issued.

With temperatures pushing above 30°C at an almost consistent basis of late, the sweltering heat has forced the National Farmers Union to urge consumers not to be discouraged from purchasing “wonky” vegetables, as crop quality begins to dwindle. Whilst warnings that vegetables may be undersized or slightly misshapen from what many are used to, the announcement was quite literally small potatoes compared to the news from the Office for National Statistics on Wednesday.

The UK’s Consumer Price Index (CPI) came in at 10.1% on an annual basis, slightly ahead of consensus estimates of 9.8% and the highest since the statistical model was introduced back in 1997, providing yet more food for thought for the Bank of England (BoE). Largely driven by a 12.6% rise in annual food prices (wonky or not), the largest since 2008, it was actually higher energy and petrol prices were the main driver over the year as a whole. Takeaway meals also leapt in price as companies looked to pass on base costs to the consumer.

Yet another strong jump in prices has led many market watchers to now predict the BoE will almost certainly be forced to raise rates by another 0.5% during their next meeting in September. Consensus now see domestic rates peaking at 3.75% around March 2023, rising from up from the 3.25% previously anticipated.

Thankfully, going slightly against the grain of worrying news, separate data showed that Britain's hot labour market was finally showing signs of cooling. Whilst the number of people in work grew by 160,000 during April to June compared with the quarter before, this was a lot less than expected, with expectation pointing to an increase of 256,000. The unemployment rate also stayed static at 3.8%, showing that although the endeavours of firms to recruit was slowing slightly, the labour market remained robust.

However, accompanying data did show that wages, excluding bonuses, during the second quarter were 4.7% higher than a year earlier, picking up pace from the three months to May. Despite this, workers are increasingly feeling the hit from price rises, earnings adjusted for inflation actually fell by 4.1%, marking the biggest drop since records began in 2001.

A theme of the week was very much central bank action, with the People’s Bank of China able to cut some key financing rates on Monday in response to soft retail sales data. However, whilst the world’s second largest economy was stimulating its economy, it seemed the world’s largest was still grappling with how to slow theirs down. US Federal Reserve minutes, released on Wednesday, showed officials saw "little evidence" late last month to suggest U.S. inflation pressures were easing and were braced for future rate hikes.

However, despite having inflation as their top concern, the minutes also flagged what will be an important dimension of the Fed's debate in coming months, when to slow down the pace of rate increases. Despite the mixed signals, financial markets took the news with some cheer, with faith clearly placed in the bank’s policymakers being experts in their field…

Next week

With the summer holidays in full swing, the coming week could be a relatively subdued one as the out of office notifications remain firmly activated.

However, for those still working, a trip to the continent should be just as eventful as for those packing their suitcases, with a raft of European PMI data is released on Tuesday. Both services and manufacturing readings for all of the continents largest economies will be included and will give us a comprehensive view of the economic state of Europe. The data will be split out amongst component parts of the bloc, with Germany and France’s readings potentially having the largest impact on markets, alongside a collated version of the data for the Eurozone as a whole. The data will also be accompanied by domestic and US versions later in the day.

Attention will be on the US come the middle of the week as Wednesday sees the American Census Bureau release its Core Durable Goods Order data. The numbers will detail the total value of new purchase orders placed with manufacturers for durable goods, often defined as items that have a lifespan of over 3 years for a business, such as tools, machinery and vehicles. The data is often very useful as it acts as a leading indicator of production, rising purchase orders signal that manufacturers will look to increase activity as they work to fill their order books.

The end of the week sees attention stay firmly in the US as monthly Core PCE Price Index numbers are released. The data differs from normal inflation readings in that it only measures goods and services targeted towards and consumed by individuals. Prices are weighted according to total expenditure per item which gives important insights into consumer spending behaviour. Adding even more importance to the figures if that this is reportedly the preferred piece of data for the US Federal Reserve, using it as their primary inflation measure.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 19 August 2022.