UK Inflation

The Office for National Statistics released new UK inflation figures, announcing a rise from 0.9% in October, to 1.2% in November. This is the highest Consumer Prices Index (CPI) rate in two years, ahead of forecasts. Higher clothing, food and petrol prices, have been driving the increase. Inflation is predicted to continue to rise and may hit 2.0% by April next year due to higher oil prices and the knock on effects from Sterling’s depreciation since the Brexit vote.

US Interest Rates

On Wednesday, the US Federal Reserve (Fed) raised the target range for the federal funds rate by a quarter-point to 0.5-0.75%. The increase was the first this year and only the second time rates have risen in the last ten years. The Fed’s policymakers also signalled three further quarter-point increases during 2017. This in response to a US economy that is gathering momentum and the prospect of further stimulus from planned tax cuts once Donald Trump is installed as President. The interest rate hike led the US dollar to climb to its highest rate against the euro since 2003.

 

US Fed Interest Rate Bands

Economic Update Graph

Source: The Federal Reserve, 16 December 2016

The US economy is now edging towards full employment and inflation is gradually approaching the “reflection of the confidence we have in the progress the economy has made and our judgement that the progress will continue. The economy has proven to be remarkably resilient”.

The Federal Open Market Committee (FOMC) said its previous projections for unemployment, inflation, and economic expansion were largely unchanged with the economy expected to expand by 2.1% in 2017, compared to their previous 2% projection. In the longer term, the FOMC pegs economic growth at a fairly anaemic 1.8%, which is interesting because it is far below Trump’s pledge of 3.5% growth on average with the aim of hitting 4% growth. There is a disconnection here between government aims and the Fed’s own expectations that form the backdrop for setting interest rates. The implication of the Fed being wrong and Trump being right is higher interest rates especially if higher inflation is to be avoided.

During Wednesday’s press conference, Yellen reasserted the need for an independent Federal Reserve and reiterated her intention to remain chair through the end of her term in February 2018. Trump has been critical of Yellen’s leadership on monetary policy and will be able to nominate a new chair after her term ends.

UK Interest Rates

Unlike the Fed, the Bank of England (BoE) held the base rate at 0.25% on Thursday – an all-time low. The decision was made on the back of sterling’s appreciation, indicating that inflation might not exceed its 2% target by a large margin after all. The Monetary Policy Committee said that the quantitative easing programme will respond “in either direction” in relation to the changes in the outlook as Brexit negotiations proceed. The inflation debate is one to follow especially as the BoE’s perspective appears to be swayed by very negative opinions on Brexit before the vote.

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