INSIGHTMOTORSPORTCONTACT
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.
US Inflation falls to lowest level in three years
Last month, inflation in the US continued to ease, according to official data, which bolstered expectations that the Federal Reserve might lower interest rates next week.
Consumer prices increased by 2.5% over the year ending in August, as prices for gasoline, used vehicles, and several other items declined. This represents the slowest growth since February 2021, down from 2.9% in July, despite an unexpected uptick in housing costs.
These figures come amid a presidential campaign where the rising cost of living has been a major topic. Analysts believe the data enhances the chances that the Federal Reserve will reduce interest rates by 0.25 percentage points at its upcoming meeting, although it diminishes the likelihood of a more substantial cut.
The data suggests that price pressures on essential household goods are easing. Grocery prices, which had been rising sharply in recent years, remained stable from July to August and are up less than 1% from a year ago. Additionally, petrol prices have fallen both from the previous month and by over 10% from August 2023.
However, prices for other items continued to increase. Excluding food and energy, which can be volatile and skew the overall picture, prices rose 3.2% over the year due to higher costs for airline tickets, car insurance, rent, and other housing expenses.
Central banks, including the Federal Reserve, began raising borrowing costs two years ago to combat inflation, which spiked globally in 2021 due to pandemic-related supply chain disruptions and increased government spending.
The situation was exacerbated by Russia's invasion of Ukraine in 2022, which led to a surge in oil prices and further inflamed global inflation. US inflation peaked at 9.1% in June 2022 but has since moved closer to the 2% range considered healthy.
UK house prices rise to highest level in two years
In August, UK house prices reached their highest point in two years, and the recent interest rate cut has bolstered homebuyer confidence, according to Halifax, the country’s largest mortgage lender.
Halifax reported that property prices increased by 4.3% compared to the previous year, pushing the average cost of a UK home to £292,505.
The lender, part of Lloyds Banking Group, noted that the recent cut in interest rates by the Bank of England at the start of August—its first reduction in four years—has invigorated the housing market. Prices are now "just shy" of the peak hit in June 2022, when they reached £293,507.
Despite this rate cut, interest rates in the UK remain at their highest level since 2008, just before the global financial crisis. The average two-year fixed-rate mortgage also improved, dropping from 5.77% to 5.54% following the rate reduction.
The Bank of England is expected to lower interest rates again this year, though the timing remains uncertain. The next meeting of the Bank is scheduled for Thursday, September 19.
In August, house prices rose by 0.3%, a decrease from July’s 0.9% increase. The recent annual growth in prices, which has reached a near two-year high for the past two months, is largely attributed to the weaker property values a year ago rather than a significant current market strength.
First-time buyers are likely to benefit from a period of more stable prices, as they monitor deposit requirements and mortgage rates closely. Northern Ireland has seen a notable surge in house prices, rising by 9.8% over the past year to an average of £201,043. In England, the north west experienced the most significant increase, with prices up 4% to an average of £232,917.
Halifax’s figures reflect only mortgage-backed transactions and exclude cash buyers or buy-to-let deals, who represent around a third of housing sales. Nationwide, another major mortgage lender, also reported modest monthly and annual increases in property prices for August.
Europe cuts interest rates again as economic recovery falters
The European Central Bank (ECB) has once again cut interest rates, lowering them to 3.5% from 3.75%.
This is the second rate cut in recent months, following the first one in June after a five-year period of holding rates steady. The decision was unanimous among the ECB’s 26 rate-setters.
The move comes as inflation in the eurozone has eased to 2.2% in August, bringing it close to the ECB’s target of 2%. Wage growth has also slowed, which may have influenced the decision.
Despite this, the ECB has kept its inflation forecast for the year at 2.5% and slightly downgraded its economic growth outlook to 0.8% from 0.9%.
The eurozone's economy is showing signs of struggle, with a narrow escape from recession last year and recent slowing growth. Germany, in particular, has faced a contraction in output for the April-to-June quarter.
While the services sector saw a boost from the Olympic and Paralympic Games in Paris, this uptick may be temporary.
Looking ahead, traders are not anticipating another rate cut in the ECB’s next meeting on October 17. ECB President Christine Lagarde has emphasised a “data-dependent” approach, indicating that future decisions on interest rates will be made based on incoming economic data.
