Why UK inflation at 3% could be bad news for UK stocks

14 February, 2018, 18:38 | Author: Terri Saunders
  • Dollar Advances As Strong US Consumer Inflation Backs Fed Rate Hike Hopes

This shouldn't really be a surprise given that in the internals of the recent PMI report showed input prices hitting an 11 month high for manufacturing.

USA retail sales dropped 0.3 percent in January, losing anticipated gains from December 2017.

Higher-paid staff are less likely to benefit, with businesses trying to limit basic increases in management pay to 1-2 percent to keep down overall wage bills, the BoE said.

The figure also fuelled warnings of another rise in interest rates from the Bank of England.

"Psychologically, 3% is a big number", says Ripley, adding that if inflationary pressures continue to build the Federal Reserve may have to hike short-term interest rates this year more than the three times they have signaled in a move to cool off an overheated economy.

Britain's minimum wage for those aged 25 and over is due to rise by 4.4 percent in April to 7.83 pounds ($10.85) an hour, while pay for some younger workers will rise by over 5 percent. Women's apparel costs jumped a record 3.4 percent, the report showed. In my opinion, there's a reasonable chance the I Bond's fixed rate will rise above 0.1% on May 1. Core CPI increased 1.8 percent vs. estimates of 1.7 percent.

The percentage change in the average composite CPI for the 12-month period ending January 2018 over the average of the CPI for the corresponding period was 16.22 per cent, or about 0.28 per cent point lower from 16.50 per cent in December 2017.

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The report follows the Labor Department's annual revisions to CPI last week that took the December monthly increase in the core index down to 0.2 percent, from an initially reported 0.3 percent.

Investors sold US government bonds Wednesday, sending yields jumping, after closely watched data showed inflation firming more than expected in January. Meanwhile, soft retail sales are probably the result of two factors - one, adverse weather shuttered sales at the start of the month (e.g. motor vehicles -1.3%); two, January may be a "pause to refresh" after a gangbusters 4Q.

A separate food price index showed inflation at 18.92 percent in January, compared with 19.42 percent in December. Higher borrowing costs slow economic growth.

Firms plan to offer average pay settlements of 3.1 percent - the highest since 2008 - compared with 2.6 percent a year ago, the BoE said in an annual survey published on Wednesday. Even so, equities have recovered some ground, advancing for three trading sessions in a row through Tuesday.

Both Gertjan Vlieghe and Ian McCafferty, external members of the Bank of England Monetary Policy Committee expressed that optimism in comments made yesterday.

Fed policy makers will also have February CPI data in hand before they next meet March 20-21 in Jerome Powell's first gathering as chairman.

U.S. bond markets began the week on the back foot after comments at the weekend by Mick Mulvaney the White House budget director that interest rates could spike as a result of the new budget plans.

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