Differing Strategies: US and UK Approaches to Inflation Fight

Rates Spark: The differing US and UK strategies to fight inflation 

The Bank of England looks increasingly likely to repeat its 50bp June panic hike. This should invert the GBP curve further. Contrast that to the Federal Reserve pushing a higher-for-longer message that may well result in a re-steepening of the front end.

 

Central banks aren't ready to see the glass half full

There are plenty of indications that inflation pressure in developed markets is easing… if you’re willing to believe in survey data and leading indicators. Germany’s Zew saw another decline in July although, as a survey of investors’ sentiment, we’re never quite sure if it leads economic data or the other way around. More telling perhaps were the details of the National Federation of Independent Businesses (NFIB) index showing a slowdown in selling prices and compensation. Even the UK labour indicators showed easing supply constraints, although private sector wages are likely to give the Bank of England (BoE) sleepless nights. All is heading in the right direction then if you’re willing the see the glass half full.

 

But that’s not how central banks see it. Past forecast mistakes and too slow a pace of disinflation (we’re not even sure we can yet talk of disinflation in the UK) mean they are likely to err on the side of remaining too hawkish for too long. The Bank of Canada (BoC) meeting today should deliver the second 25bp hike since it restarted its hiking cycle last month. Rightly or wrongly, it is seen as a bellwether for other central bank decisions later this month, and in early August in the case of the BoE. The Fed’s decision is seen as more momentous for other central banks, given how a strong dollar could complicate their own fight against inflation. This makes today’s US CPI a very important data input into central banks’ July decisions.