Inflation and Current Markets
Inflation rises unexpectedly
The Bank of England’s Monetary Policy Committee (MPC) has continued its efforts to contain price rises by sanctioning another interest rate hike but said it believes February’s surprise jump in inflation was due to “one off elements” which will probably fade quickly.
Data released last month by ONS showed that the Consumer Prices Index (CPI) annual rate – which compares prices in the current month with the same period a year earlier – stood at 10.4% in February. This was a notable jump from January’s figure of 10.1% and significantly higher than the consensus forecast in a Reuters poll of economists which had predicted the headline inflation rate would actually fall to 9.9%.
ONS said the cost of food and drinks had the largest upward impact on February’s figure. Food prices rose at the fastest rate in 45 years partly due to shortages of some salad and vegetable items, while higher food and drink prices in pubs and restaurants also pushed the CPI rate up.
Prior to the unexpected inflation jump, analysts had been evenly divided over the outcome of March’s MPC deliberations. However, after release of the inflation data, a rate rise seemed
inevitable and the MPC duly obliged, increasing Bank Rate by 0.25 percentage points on 23 March, the eleventh rise in a row.
Minutes to the MPC meeting played down the significance of February’s resurgence in inflation, reiterating the Committee’s belief that CPI is ‘likely to fall sharply’ across the rest of this year. Indeed, the minutes stated that inflation is expected to decline to a lower rate than previously anticipated due to the Chancellor’s ‘Energy Price Guarantee’ Budget announcement and further falls in wholesale energy prices, prompting speculation that the MPC may now pause its run of rate hikes. The Committee’s next decision will be announced on 11 May.
UK markets responded positively at month end after the UK’s 2022 Q4 GDP data was revised upwards, indicating that a recession had been avoided in the second half of 2022. Slower-than-expected inflation data in the US added to hopes of a pause in interest rate hikes from the Federal Reserve.
In the UK, the FTSE 100 ended March on 7,631.74, a loss of 3.10% in the month. The domestically focused FTSE 250 closed the month down 4.90% on 18,928.30, while the FTSE AIM closed March on 809.27, a monthly loss of 5.83%.
Across the pond, the Dow Jones index closed March up 1.89% on 33,274.15, while the NASDAQ closed the month up 6.69% on 12,221.91. On the continent, the Euro Stoxx 50 closed the month on 4,315.05, registering a gain of 1.81%. In Japan, the Nikkei 225 closed March up 2.17%, on 28,041.48.
On the foreign exchanges, the euro closed the month at €1.13 against sterling. The US dollar closed at $1.23 against sterling and at $1.08 against the euro.
Gold closed the month trading at around $1,979 a troy ounce, a monthly gain of around 8%. The gold price continues to rise as demand for the precious metal holds firm with expectations of the Fed easing interest rate hikes and a crisis of confidence in some major European lenders and US regional banks. Brent crude closed the month trading at around $80 a barrel, a monthly loss of around 4.5%.
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EURO STOXX 50
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