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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK inflation falls as certain food prices drop
Inflation has reached its lowest point in two and a half years, primarily due to a slowdown in the increase of food prices.
According to official statistics, prices climbed by 3.2% in the year leading up to March, a decrease from the 3.4% reported the previous month.
Certain items such as meat, crumpets, chocolate biscuits, furniture, and household goods experienced a decrease in cost, whereas petrol and diesel prices saw an increase.
However, it's important to note that lower inflation doesn't equate to an overall decrease in prices; rather, prices are rising at a slower pace.
Although the general inflation rate has declined, prices in stores remain considerably higher than they were two years ago. Meat prices, especially influenced by a drop in pork costs, decreased by 0.5% between February and March, marking a slowdown in price increases to 3.1% for the year ending in March, the lowest rate since November 2021. Similarly, prices for furniture and household goods, including cleaning products, also experienced a 0.9% decline in the year leading up to March.
High inflation in the UK in recent years has largely been driven by soaring food and energy costs. Since its peak at 11.1%
In late 2022, inflation has been gradually declining. Factors such as the aftermath of the Covid pandemic, increased demand for goods leading to supply chain issues, and geopolitical tensions such as Russia's invasion of Ukraine have contributed to fluctuations in prices.
In March, the inflation rate was slightly higher than economists anticipated, but this is unlikely to alter expectations for the Bank of England to reduce interest rates, possibly as early as June.
The Bank, which has been raising interest rates to curb inflation, is set to make its next decision on May 9. Despite efforts by central banks across Europe to manage inflation, variations in economic strengths and inflation rates among different regions may lead to divergent paths regarding interest rates.
US inflation jumps as fuel and housing costs rise
Consumer prices in the US surged unexpectedly last month, indicating a setback in efforts to curb inflation.
According to the US Labor Department, prices increased by 3.5% over the 12-month period ending in March, up from 3.2% in February.
Rising costs for fuel, housing, dining out, and clothing were the primary drivers behind this increase. Analysts cautioned that the lack of progress in reining in price hikes will likely compel the US central bank to maintain higher interest rates for an extended period.
Increased interest rates serve to stabilise prices by elevating the cost of borrowing for business expansions and other expenditures. This, theoretically, slows down economic activity, thereby alleviating the pressures contributing to price increases. Currently, the Federal Reserve's key interest rate stands at its highest level in over two decades, ranging between 5.25% and 5.5%.
Initially, forecasters anticipated the central bank to commence lowering borrowing costs this year, given the significant decline in the inflation rate from its peak of 9.1% in 2022. However, recent economic indicators, including robust job creation figures, have cast doubt on the timing of these potential rate cuts.
On Wednesday, shares on Wall Street closed lower as investors had been anticipating imminent rate cuts. Analysts, who previously foresaw rate cuts as early as March, have swiftly adjusted their expectations, with many now projecting no rate adjustments until later this summer, and some even suggesting the possibility of waiting until next year.
Although inflation cooled notably throughout 2023 as supply chain disruptions from the pandemic eased and the inflationary effects of the conflict in Ukraine diminished, it still surpassed the central bank's 2% target. Recent increases in oil prices have further elevated energy costs, while service prices show little indication of stabilising.
The Labor Department reported a 0.4% increase in prices from February to March, mirroring the increase seen in February. Higher petrol and housing expenses contributed to over half of this increase, with additional contributions from car insurance, medical care, and internet costs.
Core inflation, which excludes the more volatile food and energy prices and is regarded as a better indicator of future trends by economists, remained steady at 3.8%, consistent with February figures.
Russia to grow faster than all advanced economies says IMF
A significant global organisation has projected that Russia's economy will outpace all advanced economies, including the US, this year.
The International Monetary Fund (IMF) anticipates a growth rate of 3.2% for Russia in 2024, surpassing growth projections for the UK, France, and Germany.
The IMF attributes this growth to stable oil exports and sustained high government spending. Despite global challenges, the world economy has demonstrated remarkable resilience, according to the IMF.
With 190 member countries, the IMF's forecasts play a crucial role for businesses in investment planning and guide decisions on interest rates for central banks such as the Bank of England.
Despite sanctions imposed on the Kremlin due to the Ukraine conflict, the IMF has revised its January predictions for Russia's economy upwards for this year. While growth is expected to decrease in 2025, it remains higher than previously forecasted at 1.8%.
As one of the largest oil exporters globally, Russia's economic activity has drawn attention, especially amid revelations that significant quantities of fuel produced from Russian oil were still imported into the UK despite sanctions.
Elsewhere, the IMF has downgraded growth forecasts for Europe and the UK in 2024, projecting a modest 0.5% growth rate for the UK, making it the second weakest performer among the G7 advanced economies, after Germany. The G7 comprises France, Italy, Japan, Canada, the US, and the UK.
However, the IMF predicts an improvement in growth to 1.5% in 2025, positioning the UK among the top three best performers within the G7. Nevertheless, the IMF foresees interest rates in the UK remaining higher than those of other advanced nations, hovering close to 4% until 2029.
