Inflation 2.7 - 2.3 Wages

Higher inflation, lower pound

The Bank of England's Inflation Report last week looked for consumer prices to rise 2.7% this year. Well it got that right: figures yesterday showed headline inflation reaching 2.7% in April. But it did no good for sterling, which tied for last place with four other major currencies.

It will become clearer today what is happening to UK wages but at the last count they were up by 2.3% on the year. Consumer prices were up by 2.7% and the old retail price index, which some say is a better measure of reality, was up by 3.5%. That mismatch does not bode well for the household spending which accounts for about two thirds of the economy. Yes, people will still spend their money but they will get less for it.

That accounts for the negative reaction of sterling when the data came out. There is zero chance that the Bank of England will respond with higher interest rates: the governor has said as much. It is simply that more pounds are needed to buy the same amount of stuff so, ceteris paribus, pounds are worth less. Sterling fell by an average of -0.4% against the other dozen most actively-traded currencies, losing one yen and one euro cent.

Another day, another pickle

Hard on the heels of the dismissal of James Comey and the leaking of military intelligence to Russia the White House found itself mired in another controversy yesterday when it emerged that Donald Trump had asked the FBI director to drop an investigation. Investors reacted defensively.

Despite an unexpectedly stronger 1.0% monthly increase in American industrial production the US dollar continued its decline. Investors believe that, with one distraction following another in the administration, the president no longer has his eye on the legislative ball. That makes them nervous about the US economy and the dollar.

That nervousness was passed on to the supposedly "risky" commodity-oriented currencies, the Canadian, Australian and NZ dollars. All three of them were roughly unchanged on the day against the Greenback and the pound at the bottom of the pile while the Swiss franc and the euro prospered to the tune of 1%.

Wages and inflation

No significant US ecostats feature on today's agenda. That will leave investors to ponder the inflation figures from Euroland and the employment data from Britain.

They will be less interested in UK jobseeker numbers and the rate of unemployment than they will in the pace of wage growth. Analysts predict a 2.4% annual increase in average earnings, confirming the erosion of spending power suggested by yesterday's inflation figures. 

The finalised consumer price index data from the euro zone are expected to leave inflation unchanged at 1.9%, precisely where the European Central Bank wants it to be. At that level it should leave the path clear for the Governing Council to begin talking next month about the wind-down of its asset purchase programme, otherwise known as "tapering".