US inflation falls again
US inflation has fallen more sharply than expected to a two-year low, boosting hopes that the Federal Reserve will pause its monetary tightening after 10 hikes on the trot.
Inflation was running at 4 per cent in the year to the end of May, slightly under the 4.1 per cent expected, and down from 4.9 per cent in March.
The big question gripping financial markets is whether the inflationary slowdown will give the Fed confidence to leave interest rates unchanged when it meets tomorrow.
Officials have raised borrowing costs sharply since last year to try to rein in prices, wrenching the Fed’s key interest rate to more than 5% from close to zero in March 2022.
But analysts are now pricing in a pause – a welcome relief for businesses, mortgage-owners and US policymakers striving to boost still-sluggish growth.
The picture isn’t so rosy this side of the Atlantic, however.
UK government borrowing costs hit levels last seen during the global financial crisis today as traders priced in a higher likelihood of the Bank of England raising interest rates as high as 6 per cent.
Gilt prices slumped as the yield on the two-year notes – the return the government must offer to anyone buying its debt – jumped as much as 20 basis points to 4.84 per cent, the highest since 2008.
If the base rate reaches this level, there are growing fears about the devastating impact on mortgage rates, and the housing market. At 6 per cent, analysts reckon mortgage rates in the current market are as punitive as 13 per cent was in the late 1980s, leading to negative equity for many homeowners.
This jump in yields follows ONS data showing that UK private sector wages grew by 7.2 per cent in the three months to April – a record, if you ignore the pandemic years. Public sector wages also rose, by 5.6 per cent.
The figures will add to the Bank of England’s concern that the economy is slipping into a wage-price spiral, and most of the signs point to the Bank continuing its monetary tightening when it meets to set rates next week.
Money markets have now priced in 1.25 percentage points of hikes this year from the current level of 4.5 per cent. And comments today from Megan Greene, the latest addition to the Bank’s Monetary Policy Committee, support the idea that we haven’t seen the end of monetary tightening.
She told the Treasury Committee that halving inflation from its winter peak will be easier than bringing it down to the Bank’s target: “I think that there is some underlying [inflationary] persistence and so getting from 10 per cent to 5 per cent… is probably easier than getting from 5 per cent to 2 per cent.”
Greene also warned of the dangers of reigning in monetary tightening too soon: “If you engage in stop-start monetary policy, you may end up having to tighten even more and generating an even worse recession on the other side.”
If Greene’s comments reflect the MPC’s thinking, the pain of high rates could get a lot worse before it gets better.
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