If the narrative since the start of 2023 was that Western inflation figures were in line for a comfortable fall over the course of the year, last week highlighted that challenges remain.

In the US, released figures showed that core Consumer Price Index (CPI) inflation fell by 0.1% to a new rate of 6.4%. This was less than the expected 6.2%.

Perhaps unsurprisingly, this helped hold back US equities. For the second week in a row, the S&P 500 finished down, having fallen the prior week after several large companies reported weaker-than-expected results.

Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, warned that more short-term challenges remain: “Used vehicle prices fell 1.9%, the fourth straight hefty decline, but a temporary reversal of the downward trend is looming, in the wake of the 2.5% spike in auction prices in January; that will feed into the CPI in February and/or March.

“The story here, we think, is that a surge in used vehicle sales in January, due to the much milder-than-usual weather—we already know that new vehicle unit sales jumped 18% month-to-month—forced dealers to turn to auctions for inventory, so prices spiked. This won’t persist, given that supply is improving, and auto dealers’ margins are still hugely overextended, but it does pose a near-term threat to the CPI.”

Stronger-than-expected inflation data was matched with strong retail sales data, which together will have given ammunition to the Federal Reserve, allowing it to hold a tougher line on interest rates when they next meet.

In the UK, inflation fell from 10.5% in December to 10.1% in January. Although this remains high, this was below the 10.3% markets expected. While this makes for encouraging reading, the UK faces notable economic challenges, and is predicted to notably underperform its G7 peers in the upcoming quarters.

Felipe Villarroel, Partner at TwentyFour Asset Management, says part of the reason for this is that UK consumers are being more cautious in spending compared to their American counterparts. Noting that personal consumption typically accounts for close to two thirds of aggregate demand in developed economies, he points out UK consumers currently have much higher savings ratios and lower outstanding credit card debt than in the US.

“To be clear, we do not think the US consumer is in bad shape or irresponsibly spending its savings stack at this stage. But it is worth highlighting that part of the reason for lower UK consumption is an abundance of caution from the country’s consumers,” Felipe says.

The next Bank of England Monetary Policy Committee (MPC) meeting to decide on interest rate changes isn’t until late March, around the same day February inflation figures will be published. This means these January figures will likely have a good impact on the MPC’s next decision, which commentators believe will strengthen the MPC’s faith in its forecasts for CPI inflation to fall rapidly back to the 2% target over the next 18 months.

Overall, the FTSE 100 Index ended the week up 1.6%. Last week saw the index cross the 8,000 barrier for the first time, as its strong performance over recent weeks helped it reach historic highs.

The contrasting performance of the S&P 500 and the FTSE 100 in recent weeks emphasises that equity markets do not always move in sync with the wider economy. In this case, the UK index has outperformed it’s US counterpart, despite most expecting the US economy to outperform the UK. This can be partly explained by US consumers spending more, which is helping drive economic growth, albeit at the cost of additional inflation.

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Source:

¹Reaching Resilience: The Role of Protection in Building Financial Resilience, LV=, January 2023 (from a survey of 4,000 nationally representative UK adults)

Giving absolutely everything of yourself to this job is the only way to do it. The country deserves nothing less. But in truth that can only be done, by anyone, for so long.

Nicola Sturgeon announces her resignation after eight years leading the Scottish National Party