UK Inflation Rate Update & Fed Minutes
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On 16th August, the Bank of England (BoE) announced a welcome moderation in the headline inflation rate. In the latest reading in July, the rate had dropped to 6.8%, from 7.9% in the previous month, which marked its lowest point since February 2022.
However, core inflation remained stubbornly high, and suggested a mixed picture for the potential path of UK inflation. Some key factors that resulted in the headline numbers are the fall in gas and electricity prices, as well as a decelerating rise in the cost of food. Other large contributors to the inflation number included hotels and passenger transport.
Earlier this month, the BoE Monetary Policy Committee, consisting of nine members, cast a split vote to increase the base interest rate to a 15-year high of 5.25%, with two votes in favour of a rise straight to 5.5%. Whilst the CPI inflation figure was broadly in line with expectations, the high reading for core inflation still presents a conundrum for policymakers. The UK labour market data has provided some optimism that there could be some extra capacity slack which would abate labour cost pressures. However, wage growth (excluding bonuses) grew by 7.8% year-on-year in the three months run-up to June which, according to the Office for National Statistics, is recorded as the fastest growth rate since records began in 2001.
Fed Released Minutes Update
Over the pond, the US Federal Reserve (Fed) released minutes from its latest round of interest rate deliberations that happened in late July, where decisions were made to raise the interest rate by 0.25% points. The minutes document provided a similarly divided picture with some trepidation over the risks of pushing rates too far. Although, the majority seemed to be on the side of caution in the battle against inflation. As mentioned in the minutes document, “Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy (raising of interest rates).” Following which, the US Government Treasury yields rose on the news, and US equities extended losses. The US dollar was also seen trading higher against a basket of its major trading currencies.
Conclusion
The US Fed seems to be noticeably ahead of the UK in its efforts to curtail inflation, as seen in its latest July reading coming in at 3.2%, in comparison to the UK’s headline number of 6.8%. This difference likely suggests some divergence in interest rate policy in the short-to-medium term, and volatility between the important GBP: USD currency pair. Aside from its inflation protection qualities, gold can also act as a currency hedge, and tends to have an inverse relationship to the US dollar.
This could prove to be a good time for investors to increase their holding in gold, given the increased uncertainty of monetary policy and currencies.
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