Markets have proved somewhat disappointing recently. Both the pound and the stock market have drifted lower on fears that interest rates will move higher and stay there for longer than originally expected. The most recent driving force has been the wage inflation figures, which preceded the inflation numbers by a day. Rising 7.8%, the increase in average earnings is now at the highest rate since these figures were first introduced in 2001 and for the first time since the start of the pandemic, wages are rising faster than the cost of living.
True, the employment statistics that accompanied this news did suggest the labour market was cooling, with the jobless count up and the number in employment falling for the quarter ending in June. A continuation of this trend might lead to the Bank of England easing its monetary tightening, but a further rise in rates in September looks inevitable, probably to 5.5%. Still, it will be interesting to see what the Bank makes of what are, after all, conflicting economic signals.
Elsewhere, hard news is a little thin on the ground, as you might well expect in the middle of the holiday season. On the economic front, the slowdown in China, the world’s second largest economy, is giving cause for concern, though this could be a plus for global inflation. Moreover, there is now evidence the rise in the price of food here is slowing, though it still exceeds the rate of inflation. In Russia, interest rates have been increased to 12% to help steady a weakening rouble as the cost of the war impacts the economy.
But it really is inflation that is the focus of attention here. At 6.8% we are still much higher than in the US and Europe and it is debatable that we can meet Rishi Sunak’s target of halving the rate of inflation by the end of the current year. Little wonder that foreign exchange markets are turning their nose up at sterling, despite expectations of higher interest rates. About the only good news is that the weather has started to improve. I think I’ll forget about markets and go back to enjoying the return of summer.
