The Jupiter Merlin team discuss seemingly contradictory economic data as central banks are finding that the path to containing inflation is strewn with … difficulties.
So exclaimed the Elizabethan Lord Edmund Blackadder in the eponymous BBC comedy. In the episode entitled “Money”, financially embarrassed, indebted to the tune of one thousand pounds to the Bank of the Black Monks of St Herod (manager, “the Baby-eating Bishop of Bath & Wells”), the only solution for Edmund’s misfortune is to blackmail the manager, employing the services of Leonardo Acropolis, a jobbing portrait artist (“I am a jayniuos!”) and the hapless Lord Percy, heir to the Duke of Northumberland. Comedy gold.
Today, like Blackadder, governments find themselves financially embarrassed, laden with debt. Central banks, unlike the Baby-eating Bishop of Bath & Wells, are not armed with a red-hot poker to bring delinquent treasury ministers to heel but they too are finding that cowpats litter their own path to containing inflation. As for blackmailing the bank manager, however tempting, best not to unless a trip to the Tower is your aim.
It has been a busy week for economic data. It was a veritable mixed bag, some of it perplexing and seemingly contradictory.
In the US, the annual inflation rate for the 12 months to August increased by half a point from 3.2% in July to 3.7%, more than expected. The principal culprit was the big rise in fuel costs in the past three months: Brent crude has risen from its recent low of $71 per barrel on June 12 to over $94 at the time of writing, a 32% increase. This is already evident to consumers at the pumps. If the current US domestic wholesale gasoline price is maintained, the situation may yet get worse for the inflation data in the remainder of the quarter. Wholesale prices 12 months ago were $2.36 per gallon and were still falling, bottoming last November at $2.06, compared with $2.75 today: the year-on-year increase today is 16.5%; were the price still to be $2.75 a gallon in November, the year-on-year increase would surge to 33.5%. In this event, the base effect of the comparative time series for inflation advancing each month works against policymakers rather than in their favour. The cause of this upsurge is Saudi Arabia and Russia reinforcing their combined cuts in oil production (withholding around 1.3% of global supply in a very finely tuned and price sensitive market), designed to increase the price to their own benefit. As we pointed out in last week’s column, it is almost impossible using interest rates for a central bank directly to affect the supply-side of the economy. The Federal Reserve meets next Wednesday, 20th September, to decide on the appropriate US interest rate. Stick or twist? At Jackson Hole at the end of August, Chairman Powell said he’s not predicting further increases but do not rule them out. He can do either and say, “I told you so”.
In the UK, labour data and the latest GDP figures pointed in opposite directions. In July, the economy shrank by 0.5%: blame the weather and strikes. Unemployment rose from 4.2% to 4.3%, the highest it has been since it was falling in the immediate post-pandemic recovery period in 2021. On the other hand, UK domestic wage inflation (excluding bonuses) remained at 7.8%; the rate including bonuses rose to 8.5% from 8.4% (the non-consolidated, one-off lump-sum payments to nurses etc were a contributing factor). While the UK is vulnerable to the same trends seen elsewhere with rising fuel costs potentially hampering the path to lower inflation, these unhelpful wages data still point to inflation-adjusted real wages rising. The August UK monthly inflation data is due next Wednesday so the result will be known soon enough.
This contradictory data of an economy flirting with recession, unemployment creeping up but wages still stubbornly high and real wages increasing poses a challenge to the Bank of England’s Monetary Policy Committee which meets next week. As tends to happen in such situations of uncertainty, committee members cannot resist the temptation publicly to fly personal kites ahead of the meeting to steer opinion of what they think ought to happen. The Governor is already on record as saying UK interest rates are at or near their peak; Catherine Mann, a natural policy hawk, said recently that while the headline economy might be flat-lining, the rate of inflation is still far too high despite the Bank consistently raising interest rates since December 2021, from rock bottom to 5.25% today: she advocates that failing to kill inflation now through further rate rises now will only prolong the agony later. Meanwhile, Huw Pill, the Chief Economist, is on record saying that the risk of over-tightening could cause unnecessary long-term economic damage and that to pause now is the correct solution. We will know soon enough (Thursday, 21 September), though it is the subsequent publication of the minutes which reveals the extent of the debate and dissent or consensus in reaching the decision.
Leading the witness among its peers, however, the European Central Bank raised interest rates this week by another quarter point. ECB President Christine Lagarde pointed to eurozone inflation still being far too high. Indeed, the official average inflation rate forecast for 2024 was increased to 3.2%, still more than half as high again as the target rate of 2%; eurozone GDP forecasts out to 2025 were cut (2023, 0.7%; 2024, 1.0%; 2025, 1.5%: all of them sub-par and pedestrian).
For the optimists of the global economy, there was better news from China. As we have reported before, the Chinese economy has been suffering its own bout of turbulence, notably with poor growth, an increasingly wobbly property market and youth unemployment reaching a new high of 21.3%. However, official August data points to a strong recovery in industrial output with annual growth accelerating to 4.5% from 3.7%, and a decent rebound in domestic retail sales growth to 4.6%. While western central banks have typically been tightening monetary policy with higher interest rates and constraints on liquidity, the central bank of China has been doing the opposite, actively stimulating the economy. As India now passes China as the world’s most populous nation (though still a relative minnow in terms of share of global GDP but growing annually at 6%), a recent estimate suggests that in 2023, of the increase in global GDP of around 2.6%, a third of that will be driven by China and 14% will be directly attributable to India.
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