Interactive Investor

Must read: UK inflation, FTSE 100, China, oil

UK inflation falls as insurers drive the FTSE 100 cautiously higher, says our head of investment Victoria Scholar.

16th August 2023 09:33

by Victoria Scholar from interactive investor

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The City in spring 600

GLOBAL MARKETS

European markets have opened cautiously higher with the FTSE 100 trading around the flatline. Admiral Group (LSE:ADM) has surged to the top of the UK blue-chip index, while Aviva (LSE:AV.) is also outperforming both on stronger earnings.

China’s new home prices fell for a fifth time this year, highlighting the strain on the world’s second-largest economy from its embattled property sector. After the People’s Bank of China loosened monetary policy on Tuesday, yield differentials between the US and China expanded to their highest level in 16 years and the Chinese yuan hit a nine-month low.

Oil prices are under pressure extending losses after a 1% slide yesterday, driven by concerns about China’s weak economy.

UK INFLATION

UK July CPI dropped to 6.8% year-on-year, in line with analysts’ expectations. This is a drop from 7.9% in June and below October’s recent peak at 11.1%. The annual goods inflation rate slowed from 8.5% to 6.1% but the services reading rose slightly from 7.2% to 7.4%. On a monthly basis overall CPI fell by 0.4% compared to a rise of 0.6% in July last year. However, core CPI excluding food, energy, alcohol, and tobacco reached 6.9% year-on-year slightly ahead of forecasts for 6.8%.

Falling gas and electricity prices contributed to the drop in headline inflation with monthly gas prices falling by 25.2% between June and July, the highest fall since records began, while electricity prices also fell by 8.6%. Motor fuel prices dropped by 24.9% in the year to July, following a 22.7% drop in June.

Food and non-alcohol drinks inflation hit 14.9% in July, dropping from 17.4% in June to reach the slowest rate of growth since last September. There were particular downward effects from dairy, bread and cereals.

While goods inflation eased, pressures remain in the services sector, the key growth engine to the UK, with hotel and air passenger transport prices continuing to rise.

The trajectory for inflation is encouraging, falling significantly in recent months, and wage growth is finally outpacing inflation, providing a much-needed boost to living standards amid the cost-of-living crisis.

However, we are not out of the woods just yet. Wage growth is at record highs, raising the risk of second round inflationary effects, headline inflation is still more than three times higher than the Bank of England’s 2% target, core inflation outpaced analysts’ expectations, stuck at 6.9% and UK CPI remains above that of France and Germany.

As Chancellor Jeremy Hunt said, we’re not at the finish line yet, which suggests there could be further monetary tightening to come from the Bank of England to tackle lingering price pressures. A strengthening of the pound today also indicates that markets believe there is a growing chance of another rate hike in September. And as the stream of rate increases take their toll combined with the confluence of pressures from the war in Ukraine, elevated prices, and global economic weakness, UK recession risk is on the rise.

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