Overview of the week commencing 24 July
Graham Cross, CEO
This week we look at UK consumer prices and EU interest rates.
Most commentators, including ourselves, expected inflation to stay somewhere close to the 2.9 percent mark. In the event, the year-on-year rate of increase in the consumer price index came in at just 2.6 percent during June.
The deceleration was mostly owed to a drop in motor fuels – oil prices fell 5.0 percent in June, bringing the year-on-year decline to 10.0 percent in sterling terms. Mind you, there was a reasonably sharp decline in the core rate of inflation too. Core prices, which exclude the more volatile sectors like energy, fell from 2.6 percent to 2.4 percent.
We are not sure that this is the beginning of a decline in the headline rate of inflation. We suspect we’ll see it drift higher when the July figures are released. But it does seem that we are close to getting near the peak rate.
June’s surprisingly low inflation estimate lends further support to our assertion that Bank Rate will remain at it’s current level for a while longer.
On the continent, the European Central Bank opted for more of the same at last week’s meeting of the Governing Council; the main policy rate of interest is unchanged and the Bank will continue to hoover up a squillion euro’s worth of bonds every month. All of that is in spite of a Eurozone economy that the Bank’s president, Mario Draghi, describes as ‘robust’.
We are not sure we would go so far as to describe the Eurozone economy as robust. After all, core inflation stands at just 1.1 percent, unemployment is at 9.3 percent, wage growth languishes at 1.4 percent and the average of government debt, expressed as a percentage of GDP, is close to 90.0 percent.
Accordingly, the ECB has signalled its intention to discuss some tapering in its bond-buying programme during the Autumn. That is why the euro is flying right now.