Closing summary
Federal Reserve chair Janet Yellen opened the door to further US interest rate rises if the economy continued on track, telling US senators waiting too long to act would be “unwise”.
The comments saw the dollar move higher, with analysts suggesting Yellen had been more hawkish than expected. Against a basket of currencies the US currency added 0.36%.
But Yellen also warned that the economic outlook was uncertain, although she repeatedly refused to be drawn on what effect President Trump’s proposed policies would have on the economy.
Yellen maintained bank lending had grown despite the Dodd Frank regulations designed to avoid a new financial crisis, prompting Senator Elizabeth Warren to say Trump and his advisors were wrong to think of rolling them back. But not everyone agreed that banks were lending as freely as was claimed.
On immigration, Yellen said slowing the pace of immigration would slow economic growth.
Here is our full report on the Yellen hearing, leading on the disagreements over Dodd Frank:
Earlier, UK inflation rose at its fastest pace for two-and-a-half years but Germany’s economy grew more slowly than expected.
And with that, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Updated
Senator Chris Van Hollen asks about wage gowth.
Yellen: Somewhat faster wage growth would be consistent with our inflation objective. Ultimately real wage growth is limited by productivity growth which is why I’ve lamented it [productivity growth] has been so slow. I would like congress to focus on policies which would increase productivity...
She adds that there are a number of areas which impact productivity, including policies which promote education, innovation etc.
And with that the hearing is over.
2.5 hours questioning Yellen and no one seen fit to ask about the dollar but instead climate change etc.
— Justin (@Donnie_Eagle) February 14, 2017
Senator John Kennedy asks about slow growth, and what blame the Fed has.
Yellen: We have put in place a monetary policy to get economy growing at its potential.
She says this has boosted employment but productivity needs to improve.
Kennedy changes tack: If community banks did nothing in financial crisis why are they subject to Dodd Frank.
Yellen says they are not subject to exactly the same rules and large parts of Dodd Frank do not apply to them.
We have done our best to tailor our regulations so they are appropriate according to the risk.
Kennedy: Does it bother you no one responsible for the financial crisis went to jail?
Yellen: I think those who were accountable should have had appropriate punishment. It is up to the Justice Department to impose criminal sanctions and in many cases I understand they thought they could not get convictions.
Updated
Slowing the pace of immigration would slow economic growth - Yellen
Senator Catherine Cortez Masto asks about the benefits of immigration, and the contribution for the economy given President Trump’s recent orders. What impact would [Trump’s moves] have on our growth and competitiveness
Yellen: Slowing the pace of immigration would probably slow growth.
Masto: If the Mexican economy went into recession, what effect would that have on the US.
Yellen: Our economies are closely tied, our developments here have a spillover flow to them and there could be flows in the opposite direction.
Updated
Senator Dean Heller says he wasn’t there earlier so did Yellen say there might be a rate rise in March.
Yellen (who suddenly and coincidentally has a small outbreak of coughing) tries to pay it straight and says: I indicated that at our coming meetings we will try to evaluate whether economy is progressing in line with expectations and if it is it will probably be appropriate to raise interest rates further. A gradual rise in rates is likely to be appropriate.
Heller: Is it the same answer for an interest rate rise at the June meeting?
Yellen: The economic outlook is uncertain, but in December we said a few interest rate rises would be appropriate this year. Every meeting is live.
Heller: what effect would fiscal stimulus have?
Yellen repeats it is too soon to know what these measures are, and fiscal policy is only one of many things we have to consider.
Heller: what is better, tax cuts or spending.
Yellen: a decision for Congress.
Heller: Do you support a border tax.
Yellen also brushes this off as a matter for Congress.
[Nice try Senator Heller.]
Updated
Senator Brian Schatz asks about climate change. To what extent does Fed take this into account in assessing risks.
Yellen: In monetary policy our forecasts do not go out so far that climate change would affect economy. If have a hurricane etc, that may have impact we take into account.
Schatz: I’d like to disagree. That’s not the case any more. We’re not talking about severe weather in 15 years, we’re talking about what’s happened in the last few years. It’s having a material impact on the economy now.
Yellen: Various economic fora are looking into effects of climate change on economy. We recognise that risk events such as severe weather could have effects on the financial system. We’ve been trying to build resilience so financial companies can deal with risk events.
Wrong to say only a few businesses can't get loan - senator Tillis
Senator Thom Tillis: On bank lending, there is other research [from that quoted by Yellen earlier] showing a decrease in the amount of loans post-crisis. Is it possible that far fewer people are actually asking for loans.
Yellen: I think that is true and a lot of small businesses say growth does not justify significant expansion plans.
Tillis: Isn’t it problematic to make us think only a small number are not getting loans. I think there is pent up demand.
Yellen: Sometimes small businesses borrow against homes etc, so because there was a reduction in residential property values [there was less ability to borrow]
Our objective is for banks to lend, safe and sound loans.
Tillis: on one hand we say banks can lend to anyone, then say you can’t lend outside these narrow parameters. [Can’t say] anyone can borrow. The Dodd Frank bill expanded into [a huge amount of regulations].
Here’s a good graphic from ING Bank on Yellen’s comments:
Senator Tim Scott talks about ways to mitigate regulatory burden for smaller banks.
Yellen says this is important. Congress might want to except community banks from some of the provisions.
Trump and advisors wrong on Dodd Frank - senator Warren
Senator Elizabeth Warren brings up the Trump plan to row back on the Dodd-Frank regulations on banks. She says Trump said Dodd Frank was a “disaster’ and banks were not lending, and wants Yellen’s view.
Yellen says lending has grown, It exceeds its 2008 peak, and the same is true of total loans held by banks. We have seen healthy growth in actual lending in the economy. Over half of small businesses in a survey said they did not need to borrow.
Warren: So the data do not back up the President.
Warren than asks about comments that banks have having to hoard capital. Does this prevent banks lending?
Yellen says its not a requirement that they take the money and don’t use it, the capital is used to make loans.
Warren asks how US banks have done in comparison to foreign competitors since Dodd-Franks.
Yellen says she believes our banks are more profitable, are capturing market share from European banks, are well capitalised and seen as safe and strong.
Warren says if we are considering changing regulations, we need to start with facts and these show Trump and his advisors are wrong on every reason they’ve given for tearing up Dodd Franks. We did this kind of [lack of] regulation before and it resulted in the worst financial crisis since the great depression.
Updated
Senator Tom Cotton says wage growth has been largely stagnant over the last few years although there have been some signs of increase.
Yellen says wage growth depends on productivity growth, which has been relatively depressed in recent years. We’ve seen much higher wage growth for skilled workers, compared to less skilled.
Wage growth has picked up somewhat [as the labour market gets tighter]. We have put in place conditions intended to lower unemployment rate.. and the labour market has in a general sense started to improve.
As Yellen continues, Kathleen Brooks, research director at City Index, believes her comments on interest rates were stronger than expected:
Yellen’s tone to the newly elected Congress was definitely “ballsy”, it suggest that she will maintain the Fed’s independence, and will stand her ground when it comes to any risks that the Trump administration may (or may not) pose to financial and economic stability in the US. She was a touch more hawkish than expected, which, when combined with comments from non-voter Lacker who said that the case is building for a rate hike in March, boosted the dollar, weighed on equities and on bonds...
Watch out for who Trump picks to fill the vacant spots on the Fed. Yellen called for diversity, but if Trump fills those spots with people akin to his own world view – low rates and lower dollar – then the path of Fed policy could change sharply going forward.
Back with senator Shelby who asks about the trade imbalance and the long term effects.
Yellen says the current account deficit on goods and services has increased, it leads to a build up in our endebtedness to foreigners so it is a long term concern. It is currently close to $500bn a year.
Whether it is troubling depends on what the long term trends are.
Toomey ends by calling for the Fed not to make any new regulations until the new members of the Fed are appointed.
Not enough clarity yet on Trump policy moves - Yellen
Senator Pat Toomey asks about the Fed’s growth forecast. He says the new President committed to tax reform, rollback of regulation, an infrastructure spending bill and people believed that would give stronger economic growth, with equities rising. Yet the December Fed meeting had no change in their opinion for the prospects for economic growth. It looks like the Fed believes these things will either not happen or are not pro-growth.
Yellen says we don’t yet have clarity. Most of my colleagues decided not to speculate on the economic policy changes and their consequences. Some said they assumed there would be a mild fiscal stimulus, but most decided we wanted more clarity before incorporating them into our forecasts.
Updated
Asked about consumer lending, Yellen says it is critical to monitor for abuses in consumer lending, and says she wishes the Fed had been more active previously.
Senator Bob Menendez asks about the plans to repeal Obamacare and its effects on the economy.
Yellen says we would have to look at the effect, a loss of access to health insurance could have an impact on household spending and on the economy. Access to healthcare has likely improved people’s mobility, and losing this could have implications for job mobility.
Senator Bob Corker asks about future policy changes (from the government) and their effect on the economy (referring to Trump’s plans to boost infrastructure spending, tax reforms etc).
Yellen says: We recognise there may be significant economic policy changes and they could affect outlook. We don’t yet have enought clarity on what changes will be put in place to factor them in. We don’t want to base current policy on speculation on what may come down the line.
[Policy changes] could affect monetary policy but it depends on what they are and the timing.
We will certainly pay attention to it.
Some of the policiies being discussed may raise the deficit and have an effect on economic growth.
But I would say fiscal sustainability has been a long standing problem.
Updated
Reed asks about cyber security and how important it is for companies to have expertise.
Yellen says cyber security is a major major risk that financial firms face. Boards are aware and appreciate the seriousness of the risk. But it is very important for boards to have appropriate expertise.
Senator Jack Reed asks about Taylor’s rule for setting interest rates and what effect that would have.
Yellen says: Taylor’s rule would call for a rate between 3.5 to 4%, higher than current Fed rate. I believe we would have a weaker economy if we had followed the dictates of that rule.
Senator Richard Shelby asks about the three forthcoming openings at the Fed, and whether Yellen will see out her term which ends early next year.
Yellen says firmly: I do intend to complete my term as chair.
On the three forthcoming new members, Yellen says the role of the chair is to work constructively with all the governors.
On removing rules and regulations - including Trump’s executive order calling for removing two existing rules for every new one - Yellen says independent agencies are not bound by this.
Yellen finishes her prepared remarks. Now the questions.
Senator Sherrod Brown asks whether banks are not lending (something members of Trump’s administration have suggested)
Yellen says only 2% of small businesses said in a survey they could not get the lending they needed.
Brown: So just because people in high places say it, doesn’t make it so.
*YELLEN SAYS LENDING HAS EXPANDED, INCLUDING TO SMALL BUSINESSES
— Michael Hewson (@mhewson_CMC) February 14, 2017
Updated
Connor Campbell, financial analyst at Spreadex, said:
Yellen largely maintained the same tone seen in the central bank’s January meeting, claiming that a rate hike would be appropriate if inflation and wage growth matches the its current expectations, while hinting that Donald Trump’s fiscal policies could change the course of the Fed’s 2017 journey.
Differing views about an imminent US rate rise.
Deutsche Bank’s chief US economist says:
#Fed #FOMC #Yellen testimony gives upbeat economic assessment but does not strongly hint at a March #ratehike
— Joseph A. LaVorgna (@Lavorgnanomics) February 14, 2017
But:
US rate hike expectation for March rises to 34% from 30% on hawkish Yellen comment. Fed chair says unwise to wait too long to hike. pic.twitter.com/HZZqgtkHSW
— Holger Zschaepitz (@Schuldensuehner) February 14, 2017
Yellen warns on economic uncertainty ahead
On interest rates, Yellen said:
As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations.
At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.
On the possible policy changes which could come from president Trump:
That said, the economic outlook is uncertain, and monetary policy is not on a preset course. FOMC participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to the economic outlook and associated risks as informed by incoming data. Also, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold. While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy. Overall, the FOMC’s monetary policy decisions will be directed to the attainment of its congressionally mandated objectives of maximum employment and price stability.
Updated
US rate increase appropriate if economy is in line with forecasts - Yellen
In her opening testimony to the senate, US Federal Reserve chair Janet Yellen said a rate increase would be appropriate at one of its forthcoming meetings if employment and inflation evolved in line with expectations.
She said waiting too long to remove monetary policy accommodation would be unwise, and could require rapid, disruptive rate rises which could push the US economy into recession.
As it stands gradual increases in rates would probably be appropriate.
The jobs market is continuing to strengthen, and inflation is moving up to the 2% target.
On Trump’s fiscal policy, she said changes could affect the economic outlook but it was too early to know how this would unfold.
Wall Street edges lower ahead of Yellen testimony
US markets have dipped slightly as investors await Fed chair Janet Yellen’s comments to Congress, due to start shortly.
The Dow Jones Industrial Average is 13 points or 0.07% lower while the S&P 500 opened down 0.13% and the Nasdaq Composite slipped 0.15%.
Late last month, congressman Patrick McHenry wrote to Fed chair Janet Yellen calling on the central bank to stop negotiating agreements with other regulators.
He said: “The Federal Reserve must cease all attempts to negotiate binding standards burdening American business until President Trump has had an opportunity to nominate and appoint officials that prioritize America’s best interests.”
Now Reuters is reporting a reply from Yellen, saying such global negotiations benefit the US and the Fed has the authority and responsibility to consult with its foreign counterparts.
Another topic for today’s hearing, no doubt.
Over in Greece... farmers are holding protests against the government’s austerity-driven tax rises.
The group have reached Syntagma Square, site of the Athens parliament, chanting “people don’t bow your heads. The only way forward is organisation and struggle.”
Lambros Papaconstantinou, a farmer from Karditsa, told the Guardian:
“We are determined to go to the end because there is no other way. How can we survive when 70 percent of our earnings go on taxes, fuel costs, social contributions?”
And ahead of Yellen’s testimony:
Richmond Fed Gov. Lacker: "rates need to rise more briskly than markets now seem to expect"#FED #USD #RATES
— Sigma Squawk (@SigmaSquawk) February 14, 2017
Richmond Fed Gov. Lacker: "our next increase should come sooner rather than later"#FED #USD #RATES
— Sigma Squawk (@SigmaSquawk) February 14, 2017
Fed chair Yellen to testify to Congress
Michael Flynn may have hit the headlines by resigning as President Trump’s national security advisor, but markets are more likely to be focused on a testimony to the Senate later from US Federal Reserve chair Janet Yellen.
The Fed has indicated it could raise US rates three times this year, so any hints from Yellen in this direction - and whether the first increase will come in March - will be keenly watched. With Trump previously criticising the Fed for its low interest rate policy, her views on the president’s tax and spending plans could also form part of the questioning. David Cheetham, chief market analyst at XTB, said:
The last meeting of the US central bank saw monetary policy kept on hold, with little alteration made on the previous statement. With forward guidance implying that the rate-setting body believe there will be three rate hikes this year, the market is once more predicting a more dovish path. With an approximately 35% chance currently being given for a March hike, today’s speech could provide an opportunity for Ms. Yellen to show that she is serious in making significant progress in the normalisation of monetary policy before her term expires next year. A failure to do so could see more pressure come on the US dollar going forward, with the hugely popular call before the turn of the year for a further appreciation in the buck in 2017 starting to look in need of a more hawkish Fed.
Kathleen Brooks, research director at City Index, said:
Overall, the market is looking for three things: is the Fed still thinking about three rate hikes this year? Has anything occurred that could de-rail this expectation? Will Yellen give the markets a reality check by voicing some scepticism about potential fiscal change under President Trump?
Full story: Inflation rises to 1.8%
Here’s Katie Allen’s news story on this morning’s inflation report:
UK inflation climbed to 1.8% in January, driven by a jump in fuel prices, while the weak pound and rising oil price sent costs for firms soaring.
The Office for National Statistics said inflation was at its highest level since June 2014 and followed a reading of 1.6% in December. But it was below a forecast for 1.9% in a Reuters poll of economists, as falling clothes prices offset some of the upward pressure on inflation from fuel and food.
The more modest than expected inflation reading bolstered expectations that the Bank of England will be in no hurry to raise interest rates to keep price rises in check. Reflecting that view, the pound dipped. It had been above $1.25 against the dollar before the figures and fell to $1.2464 by late morning, down 0.5% on the day.
However, economists say inflation will rise further this year, going through the Bank of England’s target within months. Fuelling the rise is the pound’s sharp fall since the Brexit vote, which makes imports to the UK more expensive, and also the rise in oil prices on the back of lower production.
“We expect headline inflation to break through the 2% target as early as February and keep rising to around 3% by autumn this year,” said Oliver White, economist at Fathom Consulting.....
More here:
Peter Dowd MP, Labour’s Shadow Chief Secretary to the Treasury, says the solution to higher inflation includes curbs on utility firms and a higher minimum wage:
“Today’s further rise in inflation to its highest level since June 2014 shows that after seven wasted years of Tory spending cuts and failure to invest, it’s working people that are being squeezed. With shocking increases in the price of household utilities announced last week, it’s time for this government to get tough on the profiteers.
“Only Labour will take the firm action needed to end the Tories’ rigged economy, by taking action to tackle gas and electricity price rises, bringing the railways back into public ownership to end the ticket price rip-off, and bringing in a £10 per hour Real Living Wage.”
Beware 'shrinkflation'
Rising inflationary pressures may drive more manufacturers into ‘shrink-flation’, where they discretely trim the size of their products but don’t change the price.
James Brown from pricing expert Simon-Kucher explains:
We expect to see fewer or lighter promotions, and smaller or lighter products on the shelves over the coming months. The implication for shoppers is that we end up paying more for the same.
Take Quality Street tins, for example, which have been getting steadily slimmer as the years go by:
Chocolate then and now - why we're really all so outraged by the 'shrinking' Quality Street tins https://t.co/y8GRV83QYA pic.twitter.com/ie2sONTbyT
— Stylist Magazine (@StylistMagazine) November 18, 2016
But the ONS won’t be fooled. They have an army of trained price collectors, who scour the shops to check prices, and also keep tabs on whether we’re getting less for our money.
Katie Allen took a trip with one ‘inflation food soldier’ last week. Here’s her report:
Updated
James Wells of the the ONS points out that Britain isn’t the only country facing higher prices. Germany’s inflation rate jumped to 1.9% last month.....
@graemewearden German CPI at 1.9% for Jan-17, indicating more factors at play than deflation of sterling https://t.co/OIbhe9WLgV
— James Wells (@ONS_BizPrices) February 14, 2017
It's not just the UK that has experienced rising inflation in recent months; UK CPI & PPI figures for Jan out this morning... https://t.co/jldSjHnqy3
— James Wells (@ONS_BizPrices) February 14, 2017
Both countries will have been hit by the jump in oil prices over the last year.
But monetarists, such as Tim Goldsmith, blame central banks for creating too much money....
Yes you can't import it,there's only 1 cause of inflation,too many money units chasing output #Demandpull @jbhearn @graemewearden https://t.co/wRzJ5g5bSv
— TIM GOLDFINCH (@TIMGOLDFINCH) February 14, 2017
We’ve also had some disappointing economic data from the eurozone this morning.
The single currency bloc only grew by 0.4% in the last quarter of 2016, not the punchier 0.5% that was initially estimated last month.
Eurostat, the statistics body, has revised down its figures following weaker-than-expected growth figures from Germany (0.4%) and Italy (0.2%) this morning.
And in another blow...Greece is shrinking again. New figures show that its GDP shrank by 0.4% in October-December.
Mon: EU Commission says Greece recovering, IMF too pessimistic
— Marcus Walker (@MMQWalker) February 14, 2017
Tue: Greek data show economy contracted in Q4
More woes for Greece: the economy suffered a shock contraction at the end of 2016 https://t.co/OjRdxIZq1W pic.twitter.com/TukJJaAXU6
— fastFT (@fastFT) February 14, 2017
The cost of living squeeze is already forcing some families to seek help handing their debts, warns the Money Advice Trust.
Jane Tully, director of external affairs, fears that rising inflation will drag more people into difficulties:
“Household budgets are being chipped away by this new squeeze on personal finances – and many people who are only ‘just about managing’ risk falling into problem debt as a result.
“Demand for debt advice is already surging this year, and this demand is likely to continue to grow as the squeeze continues. Rising inflation and high levels of household borrowing mean that it has never been more important for government, advice agencies and lenders to work together to make sure people get the help they need.
“Anyone struggling to cope should seek free advice from a charity-run service like National Debtline as soon as possible.”
UK inflation in detail
There are two main factors that drove Britain’s inflation rate jumped from 1.6% to 1.8% last month -- fuel costs surged, and the long run of falling food prices is levelling out.
The ONS says that:
-
Transport: prices, overall, fell by 0.6% between December 2016 and January 2017, compared with a larger fall of 2.5% a year ago. Within transport, the largest upward effect came from motor fuels, with prices rising by 3.4% between December 2016 and January 2017, having fallen by 2.6% a year earlier.
-
Food and non-alcoholic beverages: Food prices were unchanged between December 2016 and January 2017, having fallen by 0.6% a year ago. Following a sustained period of deflation of food prices since mid-2014, during which the 12-month rate was often lower than negative 3.0%, the rate has increased for 4 consecutive months, reaching negative 0.4% in January 2017. This is the highest it has been since June 2014.
But...this was partly countered by cheaper clothing costs, thanks to the post-Christmas sales.
The ONS explains that:
- Clothing and footwear: the downward effect was due to prices for a wide range of items of clothing and footwear. Overall, prices fell by 4.2% between December 2016 and January 2017, compared with a smaller fall of 3.1% last year. Sales patterns may have contributed to this, as the proportion of items on sale increased by more between December 2016 and January 2017 than it did a year ago.
Hannah Maundrell, Editor in Chief of money.co.uk, has some advice for readers worrying about inflation:
“The Brex-effect is starting to bite into our wallets and put extra pressure on our household budgets. With the cost of fuel shooting up there’s never been a better time to rethink your travel arrangements. Now might be the time to look at car sharing, cycling or at least clearing out your boot to make your driving more economical.
“This news will hurt anyone with savings; if your account isn’t paying you at least 1.8% your money will be losing buying power. Don’t let your bank keep your hard earned cash without giving you a decent return; use savings to pay off expensive debts or get a high interest current account.”
How high could inflation go this year?
Andrew Sentance, senior economic adviser at PwC, reckons it could spike to 3% - well over the Bank of England’s target (and probably exceeding many people’s pay rises).
He says:
“The trend is clearly towards higher inflation, however, and we should expect the rate of price increases to rise above the 2% Bank of England target in the next few months.
By the end of this year, inflation is likely to be around 3pc and possibly even higher. Rising energy prices and the weakness of the pound are the main factors behind this expected increase.
Britain isn’t the only economy facing higher inflation, points out Ian Stewart, chief economist at Deloitte.
He says:
“Rising inflation is not just a UK phenomenon and is not just currency-related.
Prices are rising across the West, as higher fuel and other commodity prices feed through to consumers. In fact, German prices have risen faster than UK prices in the last year and last month Germany’s inflation rate was higher than the UK’s [at 1.9%].”
This ‘reflation’ trade is one reason that world stock markets are climbing, with Wall Street hitting record highs again last night.
TUC General Secretary Frances O’Grady is very concerned that inflation is going to take a big chunk out of workers’ earnings - particularly public sector workers, whose pay rises are capped at 1%.
“The last thing working people need is another pay squeeze. But prices are shooting up and real wage growth is stalling.
“Next month’s Budget must set out a clear plan for preventing another living standards crisis – families still haven’t recovered from the last one.
“This should include ending the current pay restrictions on nurses, teachers and other public servants.”
Jeremy Cook of World First is in the Valentine’s spirit:
“Roses are red,
— World First (@World_First) February 14, 2017
Inflation is climbing,
But with wage growth in doubt,
Can consumption keep thriving?”
Updated
Ben Brettell, senior economist at Hargreaves Lansdown, fears that inflation will overtake wage rises this year - meaning real incomes will start falling again.
He points to the surge in the cost of imported raw materials:
Sterling has fallen around 12% on a trade-weighted basis since last June’s referendum, and as a result producers are facing sharply higher input costs – up 20.5% on a year earlier.
It’s almost unthinkable that cost increases of this magnitude can be fully absorbed, leaving firms with little choice but to pass at least some of the burden onto consumers. By the end of the year price inflation looks set to outstrip wage growth, which will squeeze household budgets in the short term.
Good grief! The prices paid by UK manufacturers for imported raw materials and fuel jumped by 20% in January, compared to a year earlier.
That’s largely due to the fall in sterling (down 13%), and and the higher cost of crude oil (up 82% year-on-year).
Factories are now passing some of this cost onto their customers. Output prices rose by 3.5%, which is likely to push consumer price inflation up in the months ahead.
Fidelity: Weak sterling is stoking inflation
This jump in inflation shows that Britain is now suffering the impact of the slump in the pound since the Brexit vote.
So says Tom Stevenson, investment director for Personal Investing at Fidelity International, who believes the cost of living will keep climbing.
“The fall in the pound is really starting to stoke inflation as the rising cost of imports bites. A sharp rise in UK CPI now sees inflation within a whisker of the Bank of England’s 2% target. Sterling weakness has continued to push fuel and food prices higher, resulting in today’s CPI reading of 1.8%.
“With Britain seemingly heading for a hard Brexit, it’s likely we will see the pound continue to wobble over the next two years, resulting in higher inflation in the short term. Indeed, price rises are expected to reach 2.8% by the end of the year.
“With inflation forecast to exceed the Bank of England’s target this year, still slow wage growth and Mark Carney showing no intention of raising rates any time soon, millions of households will begin to feel the financial squeeze in their pockets. Rising prices and relatively stagnant incomes are a painful combination.
Treasury: Families are worried about the cost of living
Today’s rise in inflation will leave many people worrying that their disposable income is shrinking, especially if their pay isn’t rising at a similar rate.
The Treasury admits that this is a worry, with a spokesperson saying that:
“Employment has reached record levels and earnings have risen faster than inflation for more than 2 years.
The government appreciates that families are concerned about the cost of living and that is why we are cutting taxes for millions of working people and have frozen fuel duty, saving an average driver £130 a year compared to previous plans.”
The pound has fallen by half a cent against the US dollar since the inflation figures came out, to $1.247.
That’s because City economists had expected an even sharper rise in inflation, to 1.9%.
Look at what happened to the pound after Britain's inflation picked up by less than forecast https://t.co/GcvQT09CRy pic.twitter.com/RjPjCgyG6Z
— Bloomberg Brexit (@Brexit) February 14, 2017
Motor fuel costs push inflation higher
Britain’s inflation rate is being driven up by the rising cost of motor fuels, says the Office for National Statistics.
That’s because the oil price has risen sharply over the last year, from $33 per barrel to around $55 today.
Food prices also had an upward impact on the cost of living in January. But clothing and footwear prices fell by more than a year ago.
Britain’s CPI inflation rate is now at its highest level since June 2014:
UK inflation rises to 1.8%
Breaking! Britain’s inflation rate has jumped to 1.8% in January, up from 1.6% in December.
That’s takes the Consumer Prices Index closer to the Bank of England’s 2% target, and suggests that the weak pound is continuing to drive up the cost of living.
More to follow!
UK consumers expect faster inflation this year
It’s nearly time for the latest UK inflation figures, which will show how the cost of living increased in January.
In the meantime, market research firm GfK has just reported that 34% of people expect future consumer price increases will happen “more rapidly” than the past 12 months.
This is more than three times as many as the 11% that thought this in January 2016.
Joe Staton, Head of Market Dynamics at GfK, says:
“The fall in the value of the Pound since the Brexit vote has fuelled speculation among both business leaders and consumers alike that we will see accelerated price inflation filter through to the High Street this year.
Consumers have already been hit by higher food and energy prices because the weakness of sterling is raising prices and reducing consumer spending power. This has affected a range of typical purchases from Marmite to Majorca summer holidays.
This chart, from economist Rupert Seggins, shows how the pound (in red) has weakened since last summer’s referendum.
Inflation is rising, but history suggests that the biggest pressure from sterling on inflation is still several months away. pic.twitter.com/oyuSbwOjEs
— Rupert Seggins (@Rupert_Seggins) February 14, 2017
Italy grows by just 0.2%
Italy’s growth figures are out...and, like Germany’s, they’re weaker than hoped.
The Italian economy (rarely the most vigorous of beasts) expanded by a meagre 0.2% in the last thee months of 2016.
Some economists had hoped Italy might hit the dizzy heights of 0.3% growth, which would still have been below the euro average.
GDP in Italy and the Netherlands fall short of expectations, too, at 0.2% and 0.5% QoQ, respectively, in Q4.
— Frederik Ducrozet (@fwred) February 14, 2017
*ITALIAN ECONOMY EXPANDED 0.2% IN 4Q Q/Q; EST. +0.3%
— Michael Hewson (@mhewson_CMC) February 14, 2017
Back to today’s growth figures...and the Netherland’s economy has slowed.
Dutch GDP rose by 0.5% in the last three months of 2016, a decent-enough number, but rather slower than the 0.8% growth recorded in July-September.
There’s drama in Tokyo this morning, where Toshiba has revealed it is taking a $6.3bn writedown on its troubled nuclear power division, and announced that its chairman is stepping down.
Toshiba has also been forced to delay the publication of its latest earnings report, as it tries to assess the full damage following its mishandled purchase of a US construction firm.
Here’s the full story:
Commerzbank analyst Joerg Kraemer argues that Germany’s economy is still in good shape, even though growth missed forecasts in the last quarter.
He says:
“The fourth quarter was not as strong as most economists had expected, but sentiment surveys rose sharply in the past months and orders are also pointing upward,”
“Therefore growth could slightly pick up in the first quarter of 2017.”
Rolls-Royce shares fall after record loss
It’s a historic day for Rolls-Royce, for the wrong reasons.
The engine-maker has reported its biggest ever loss, a whopping £4.6bn, this morning, due to sterling’s weakness and the company’s £671m fine for bribery.
CEO Warren East argued that Rolls is making good progress with its cost-cutting programme.
But the City isn’t impressed, sending its shares down 3% in early trading....
Finland's GDP shrinks by 0.5%
In another blow to the eurozone, Finland’s economy is shrinking again.
Finnish GDP contracted by 0.5% in the final three months of 2016, new figures show, wiping out the 0.4% growth in July-September.
Austerity, the demise of Nokia, and the sanctions imposed on Russia have all hurt Finland’s economy; today’s figures show its economy is only 0.2% larger than a year ago.
Frederik Ducrozet of Swiss bank Pictet fears that Germany could drag the overall eurozone growth rate down, from the ‘flash’ estimate of 0.5% in Q4.
Germany not ending the year with a bang after all. Q4 GDP falls short at 0.4% QoQ; Q3 revised to 0.1%; core inflation eases to 1.5% in Dec.
— Frederik Ducrozet (@fwred) February 14, 2017
Beware of revisions to December activity data in Germany. But for now the risk is for euro area Q4 GDP to be revised down to 0.4% QoQ.
— Frederik Ducrozet (@fwred) February 14, 2017
Holger Zschaepitz of Welt points out that net trade had a negative impact on German growth (because imports grew faster than exports)
Oops! #Germany accelerates less than forecast amid trade drag. GDP grew by 0.4% in Q4 after Q3’s downwardly-rev 0.1% https://t.co/ahYY8SOuTU pic.twitter.com/p4wgcpFOVQ
— Holger Zschaepitz (@Schuldensuehner) February 14, 2017
Updated
German GDP misses forecasts
Germany’s economy didn’t perform as well as hoped in the final three months of last year.
New figures show that German GDP expanded by 0.4% in the October-December period, weaker than the 0.5% which economists had predicted.
That means Europe’s ‘powerhouse economy’ lagged behind the UK, which grew by 0.6% in the same period.
In a double-whammy, German growth in the third quarter of 2016 has been revised down too, from +0.2% to just 0.1%.
Gross domestic product up 0.4% in 4th quarter of 2016 #GDP https://t.co/TVTbRCSA0O pic.twitter.com/oxX9eVuNtG
— Destatis news (@destatis_news) February 14, 2017
German’s statistics office says that foreign trade held back growth in the last three months of the year, with imports growing much faster than exports.
But growth was supported by government spending, and a small pick-up in consumer spending too.
Q4 2016 #German #GDP #growth of 0.4% due to strong govt spending & modest rise in consumer spending. Investment up, especially #construction
— Howard Archer (@HowardArcherUK) February 14, 2017
Reaction to follow....
Updated
The agenda: Growth figures, UK inflation, Yellen and Greece
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
There’s lots on the agenda today.
For starters, we’re getting growth figures from Germany (out now) and Italy (9am GMT) for the last three months of 2016. That’s followed by a new estimate for eurozone GDP at 10am.
Then at 9.30am it’s the latest UK inflation data, which is likely to show another jump in the cost of living. Economists expect that inflation rose by around 1.9% in January, up from 1.6% in December.
On the corporate front, engine maker Rolls-Royce is reporting results for the first time since it took a £671m fine to settle bribery claims.
Then this afternoon, America’s top central banker Janet Yellen is testifying to Congress, from 3pm GMT. She can expect questions on the state of the US economy, president Trump’s fiscal plans, and the prospect of interest rate rises soon.
Some on Wall Street reckon the Fed won’t manage its target of three hikes this year, so Yellen’s comments could move the dollar.
RBC Capital Markets say:
Given the uncertainty of timing on the fiscal agenda and the relatively modest uptick in inflation thus far this year, we think it will be difficult for the committee to get enough members onboard for a hike in March (not to mention that the French election in late April/early May looms large as a potential catalyst for global volatility).
But Yellen could certainly move the “perception” needle on this.
There may be drama in Greece; hundreds of farmers are expected to protest against the government’s austerity measure in Athens today.
Updated
