AFTERNOON SUMMARY
Time for a quick recap:
Britain’s inflation rate has hit its highest level since November 2014, at 0.6%, thanks to a rise in alcohol, transport and hotel costs.
The Office for National Statistics says there is no immediate impact from Brexit, but today’s data also shows that firms are being hit by higher input prices, due to the weaker pound. That is likely to push inflation higher in the month ahead.
Pension experts fear that savers are going to suffer, at a time when pension deficits are already swelling.
Some economists predict that wages will fail to keep pace with rising prices next year, meaning real incomes could start falling again.
Rail customers are already facing the prospect of higher fares in 2017, after the Retail prices index jumped to 1.9%.
But there’s relief at the Bank of England this afternoon, after its QE stimulus programme got back on track.
Here’s our latest news stories and analysis of the data:
Although today’s QE auction is technically a success, the Bank of England has been forced to dig deep into its pockets to persuade investors to sell their gilts.
For example, it bought 30-year gilts at an average yield of 1.259%.
That’s below the 1.3% which these long-dated bonds are changing hands in the City today - meaning the Bank effectively paid over the odds (because yields move inversely to prices).
Economist Shaun Richards reckons it’s a bad deal.
Bank of England hits its QE target of £1.17billion but look what it has paid! UK 2068 Gilt average yield 1.147% #BoE
— Shaun Richards (@notayesmansecon) August 16, 2016
Our grandchildren may not be so keen on what the Bank of England has paid for our 2068 Gilt today #QE #CalamityCarney
— Shaun Richards (@notayesmansecon) August 16, 2016
On the other hand -- the Bank’s priority is to pump £60bn into the financial sector and drive down gilt yields. So on that measure, it’s a success....
Updated
Bank of England succeeds in QE auction
Breaking! Britain’s central bank has successfully bought £1.17bn of long-dated UK government debt.
Unlike last week’s partially failed operation, the Bank of England had no trouble buying all the gilts it needed, to implement its new quantitative easing programme.
Indeed, investors offered to sell over £3bn of gilts, allowing the BoE to cherrypick the lowest prices in today’s ‘reverse auction’.
That will please the Bank, and its governor Mark Carney, as the £60bn QE programme is a key part of his plan to protect the UK economy from the Brexit vote.
BoE gain a cover ratio of 2.67 (Prev. 0.96) in their 15+ year APF Gilt purchase. Phewwww
— RANsquawk (@RANsquawk) August 16, 2016
UK APF cover 2.67. Another bullet dodged for today. Gbp crawling up
— Kit Juckes (@kitjuckes) August 16, 2016
Updated
Heads-up. The Bank of England has just launched a new attempt to buy more than one billion pounds worth of long-dated government bonds from investors.
This is the latest stage in the BoE’s £60bn quantitative easing programme, launched earlier this month.
Last week, the Bank fell £52m short of its target - with gilt owners deciding to hold onto their precious assets.
Could we see another failure today? Possibly...but I suspect that the Bank will simply stump up enough money to get the full £1.17bn allocation. The ‘reverse auction’ ends at 2.45pm BST, so we haven’t got long to wait for the result....
Food prices in British shops could soon rise sharply, if shops decide to pass on higher import costs.
The end of UK food price deflation? Food import prices rising sharply - supermarkets absorbing...so far. #inflation pic.twitter.com/8BARrX6QFU
— Marcus Wright (@MarcusEconomics) August 16, 2016
US inflation rate drops
Just in: America’s annual inflation rate has fallen back to 0.8% in July, from 1.0% in June.
New figures show that petrol (oh OK, gasoline) prices fell for the first time in five months, meaning the monthly CPI was unchanged compared with June.
Economists had expected an annual inflation rate of 0.9%, with prices up by 0.1% during the month.
America’s top central bankers at the Federal Reserve have a 2% inflation target (like the Bank of England), so some investors may now conclude that US interest rates are less likely to rise any time soon.
Here’s a quick breakdown of the UK inflation figures, in case you’re just tuning in.
The Consumer Prices Index, which is the official inflation measure targeted by the Bank of England, rose to 0.6% year-on-year in July, up from 0.5% in June. That’s the highest rate since November 2014.
That’s mainly because:
- Transport prices rose by 1.6% between June and July this year, compared with a rise of 1.2% between the same 2 months a year ago. That’s mainly due to more expensive petrol and diesel at the pump, and a rise in international rail fares.
- Alcoholic beverages and tobacco prices rose by 0.5% during the month (a blow to Remain campaigners looking to drown or puff away their sorrows).
- Restaurants and hotels: prices, overall, rose by 0.4%, compared with a smaller rise of 0.1% a year ago.
The wider Retail Prices Index, which includes housing costs, jumped to 1.9% from 1.7% last month:
The data also shows that the weak pound is starting to feed through to UK businesses.
- Producer prices (basically how much companies are charging for their products) jumped by 0.3%
- Input prices (the cost of raw materials) jumped by 3.3% during the month.
British factory gate prices rose 0.3% - fastest pace in 2 years as fall in sterling pushes up import prices pic.twitter.com/n2mapGDfqw
— Tom Knowles (@tkbeynon) August 16, 2016
In other news... German companies have shaken off the immediate shock of the Brexit vote.
The investor confidence measure calculated by Germany’s ZEW Institute rose to 0.5% today, having tumbled to -6.8% in July.
Anna Zabrodzka, economist at Moody’s Analytics says the situation is still fragile, though:
The improvement in confidence has been rather moderate and sentiment remains low, as the economic outlook for Europe became increasingly uncertain following the U.K.’s vote to leave the EU.”
Here’s our economics editor Larry Elliott on today’s inflation figures:
The post-Brexit panic selling of sterling is over but the pound still looks a sell. That’s because the Bank of England has made it clear it is less bothered about the prospect of inflation rising over the coming months than it is about growth and unemployment. In all probability, there will be a further cut in interest rates and there may be another dollop of quantitative easing.
Both will weaken sterling, pushing CPI inflation above its 2% target next year.
More here:
The TUC trade union also fears that Britain’s inflation rate is going to keep rising in the coming months, hurting workers.
The solution, they argue, is a burst of well-targeted government spending to protect the economy.
Here’s general secretary Frances O’Grady:
“The slight uptick in inflation is likely to be followed by further increases in prices as the weak pound feeds through to higher costs for every day goods.
“And following the decision to leave the EU there is a real threat to jobs and growth.
“That’s why the TUC is calling for urgent government action to ensure working people do not pay the price for Brexit. The government should act now to increase investment in infrastructure, build new homes, announce plans for more high-speed rail and give the go-ahead for a third runway at Heathrow.”
Given Britain’s government can borrow at record low levels – just 0.5% per year for a decade – it’s certainly a good time to investing in the future....
Updated
There’s widespread concern that UK rail fares are going to jump by 1.9% next year, tracking the rise in the Retail Prices Index of inflation.
The Transport Salaried Staffs’ Association general secretary, Manuel Cortes, said:
“Our rail fares are already the highest in Europe and today’s increases will only make that record worse. It’s time that ministers gave rail passengers a break and actually froze fares in real terms.”
PcW, the consultancy firm, are also unimpressed, arguing that the system is out of date and needs reforming.
.@PwC_UK slam use of "anachronistic RPI" for rail fares: "Bad news unless the govt steps in"https://t.co/R8TKQOH7Jq pic.twitter.com/TvobBWBq2m
— Jake Cordell (@JakeCordell) August 16, 2016
Here’s our news story on the issue:
Experts: UK inflation heading for 2% thanks to Brexit vote
Many City economists are predicting that UK inflation will soar toward, or even over, the official target of 2% by early next year.
That’s due to the weaker pound, as firms are forced to push higher import prices onto consumers.
John Hawksworth, chief economist at PwC, says this will hurt consumers:
“The first post-referendum data saw the consumer price inflation rate (CPI) edge up from 0.5% in June to 0.6% in July, but it will be some time before the full effect of the fall in sterling following the Brexit vote comes through.
Eventually, however, we would expect this to push CPI inflation back up towards its 2% target rate by mid-2017 as import prices rise. A weaker pound is good news for British exporters but will put a squeeze on the real spending power of consumers.
Martin Beck, senior economic advisor to the EY ITEM Club, also expects inflation to spike:
“Inflation reached its highest rate for 20 months in July but is still short of the 2% target. We are likely to see inflation continue to rise over the remainder of the year and to climb above 2% by early 2017. However, with core inflationary pressures remaining very muted, in line with the enduring softness of wage growth, we expect inflation to peak at 3%.
Sam Tombs of Pantheon Economics also sees higher inflation on the horizon:
Pick-up in CPI inflation in July entirely due to ↓£'s boosting fuel, food & drink prices. Still heading for 3% in17: pic.twitter.com/N3GAJ7Ayme
— Samuel Tombs (@samueltombs) August 16, 2016
Updated
The jump in inflation is bad news for savers, who have just seen UK interest rates slashed to 0.25%.
It could also hurt pension funds, who are facing monstrous deficits thanks to the slump in government bond yields to record lows.
Charles Cowling, director at consultancy group JLT, fears trouble ahead:
“Latest inflation figures confirm a Brexit double whammy for pension schemes, the first post Brexit evidence of the impact of falling sterling on UK prices.
“The July rise in inflation heaps further woes on pension schemes that had already seen their deficits soar post Brexit as a result of the latest round of QE and falls in interest rates. With pension benefits being linked to inflation, deficits will likely worsen further, adding pressure on trustees and companies alike.
“Whether or not Brexit is good for the UK economy, it has certainly been calamitous so far for pension schemes which were already suffering massively in markets which have been extremely difficult. This latest news must increase the likelihood of the Brexit effect bringing down some companies and their pension schemes.”
Analyst: Prepare for real wages to shrink
The rise in inflation during July actually shows that the UK economy was in good health before the EU referendum, argues Kallum Pickering of German bank Berenberg.
Prices continued to fall for food and non-alcoholic beverages, due to strong competition in the supermarket sector. Most of the upward pressure came from components linked to growth in discretionary spending such as restaurants and hotels and recreation and culture.
However... Pickering also warns that the Brexit vote WILL push inflation higher, and also erode our wages. That means real pay may actually start shrinking next year.
During the euro crisis, nominal wage growth slowed to a less than 1% year-on-year. With inflation rising to at least the 2% target by early next year, real wages will probably decline during 2017.
That echoes a warning from the Resolution Foundation today, who fear that the economic damage of Brexit will more than wipe out any benefit from cutting inflation:
This chart, from Ross Finley of Reuters, shows how UK firms had to pay more for their raw materials last month, following the slide in the value of sterling:
While everyone watches UK consumer price inflation...input prices on the rise, spurred on even more by fall in GBP pic.twitter.com/nsZIjiXey0
— Ross Finley (@rossfinley) August 16, 2016
And you can clearly see the impact in the cost of imports:
Producer price inflation, components. Striking shift is partly due to sterling depreciation. pic.twitter.com/XqPDMFPQyC
— (((FrancesCoppola))) (@Frances_Coppola) August 16, 2016
Pound rallies after inflation rises fastest than expected
The pound has gained almost one cent against the US dollar since the inflation report was released, to $1.297.
It has also recovered from this morning’s three-year low against the euro, and is now worth €1.152. (up from €1.146).
Traders may be calculating that higher inflation will make it harder for the Bank of England to cut interest rates any further.
Eur/GBP back flat after inflation comes in stronger than expected as import costs surge most since 2011 pic.twitter.com/pIFnPQnHBe
— Caroline Hyde (@CarolineHydeTV) August 16, 2016
Updated
ONS: No obvious impact from Brexit
Today’s inflation report is the first official government data that covers the period after the EU referendum, so can we see a Brexit effect yet?
Mike Prestwood, head of prices at the Office for National Statistics, argues that we can’t. However, he does also point out that UK companies put their prices up in July, which could indicate that prices in the shops will rise this autumn.
Prestwood says:
“There was no obvious impact on today’s consumer prices figures following the EU referendum results though the Producer Prices Index suggests the fall in the exchange rate is beginning to push up import prices faced by manufacturers.”
It’s also probably too early to spot signs of Brexit damage in the economy, just because it takes time for changes in business strategy, consumer behaviour and currency moves to feed through to the high street.
Ben Brettell, senior economist at financial services firm Hargreaves Lansdown predicts that inflation will keep rising. Here’s his take:
Perhaps in a taste of things to come, import prices rose 6.5% year-on-year, their fastest rate in five years.
However, in truth the small tick upwards in the headline rate to 0.6% tells us little. The ONS collects data in the middle of each month, so the prices were collected just two or three weeks after the vote. It’s almost certain that the weaker pound will cause inflation to rise more sharply in the coming months, but the effect of sterling’s depreciation will take time to feed through fully into the figures as businesses gradually adjust to the new environment.
Updated
UK factory gate prices have jumped
We also have evidence that the plunge in the value of the pound since the Brexit vote is hitting UK businesses.
Producer prices, which measure how much British firms charge for their wares, rose by 0.3% in July. That’s the fastest rise in more than two years, and suggests that companies are passing on higher import costs to consumers.
This will probably feed into the headline inflation rate in the next few months.
UK Producer Price Inflation showing some impact of GBP devaluation. Been on up trend since GBP deval began in Nov 15 pic.twitter.com/vVDuzYv0tE
— Raoul Ruparel (@RaoulRuparel) August 16, 2016
Updated
This chart shows how transport, alcohol and hotel bills drove up the cost of living last month:
Updated
Rail fares to rise by 1.9%
Bad news for rail travellers - the Retail Prices Index (another inflation measure) has jumped to 1.9% in July.
That means that regulated rail fares could also rise by 1.9%, as RPI is used to set rail fares for 2017.
Protests are already taking pace at London rail stations today, from campaigners angry that fares have risen twice as fast as wages since 2010.
Labour leader Jeremy Corbyn is taking part, and arguing that the UK rail network should be taken back into public ownership.
Why inflation went up.
At 0.6%, Britain’s CPI inflation rate is now at its highest level in 20 months.
The ONS says:
Although the small increase in the rate between June 2016 and July 2016 takes it to the highest seen since November 2014, it is still relatively low in the historic context.
The main contributors to the increase in the rate were rising prices for motor fuels, alcoholic beverages and accommodation services, and a smaller fall in food prices than a year ago.
These upward pressures were partially offset by falls in social housing rent, and falling prices for certain games and toys.
Higher transport costs helped to drive Britain’s inflation rate up, according to the Office for National Statistics.
UK CPI: "The main contributors to the increase in the rate were rising prices for motor fuels, alcoholic beverages & accommodation services"
— RANsquawk (@RANsquawk) August 16, 2016
UK INFLATION REPORT RELEASED
Breaking! Britain’s inflation rate rose in July.
The Consumer Prices index, the benchmark measure of inflation in the UK, jumped to 0.6%, up from +0.5% in June.
Detail and reaction to follow.....
The pound has hit its lowest point against a basket of rival currencies since 2010.
Reuters has the details:
Sterling was down 0.4 percent at 87.15 pence per euro, having hit a three-year low of 87.20 pence. Against a generally weaker dollar, it was a touch higher at $1.2915.
The trade-weighted sterling index was down 0.1 percent at 76.8, having shed over 12 percent since June 23, when Britain voted to leave the European Union in a referendum. The index was its lowest since March 2010, Reuters graphics showed.
This chart shows its recent tumble against the euro, to its lowest since 2013.
Updated
As expected, the London stock market has fallen slightly in the first hour of trading.
The FTSE 100 is down 18 points at 6922, having closed at its highest point since June 2015 last night. Mining firms are rallying, but financial stocks and supermarkets are down.
Here’s the details:
Rail campaigners are urging the government to introduce part-time season tickets, to protect commuters from the impact of another fare hike.
As explained earlier, today’s Retail Prices Index will determine how much train operators can raise prices by (the formula is currently RPL +0%).
New research shows that fares have risen twice as fast as wages since 2010, prompting calls to rein in the sector. More here:
FXTM Research Analyst Lukman Otunuga says sterling is under “immense pressure” ahead of the July inflation report, due in 50 minutes.
The rising expectations of further monetary stimulus from the Bank of England to quell the Brexit chaos has enticed bears to install repeated rounds of selling, consequently leaving Sterling vulnerable to heavy losses.
Sentiment is firmly bearish towards the pound, and the awful combination of soft domestic data coupled with heightened hopes of the BoE cutting UK rates to near zero should ensure prices remain depressed for an extended period.
Pound hits new three-year low
Sterling has slipped to a new three-year low against the euro, as traders get ready for the July inflation report.
One pound is currently worth just €1.1476, its lowest level since August 2013. That means one euro is worth 81.1p.
Slerling is also bobbing around a one-month low against the US dollar this morning, at $1.289.
Pound holds decline before first post-#Brexit inflation data https://t.co/bbB8C5nx5n via @aragaomarianna pic.twitter.com/fLENe4Gae8
— Forward Guidance (@ecoeurope) August 16, 2016
Updated
Anthony Cheung of City firm Amplify Trading hopes for a break from the August news lull today:
Interesting day for UK markets with inflation data at 9.30am (Brexit impact) & longer dated (15yr +) buyback from the BoE (failed last week)
— Anthony Cheung (@AWMCheung) August 16, 2016
Updated
Inflation: What the economists expect
Higher food and fuel prices probably pushed Britain’s inflation rate up last month, predicts Naeem Aslam of Think Markets UK.
Today, more light will be shed on the consequences of the Brexit vote in terms of CPI data.
It is very important to keep in mind that Brexit has not happened yet, only the Brexit vote has occurred and they are two different things. The Bank of England has already accepted that one of the consequences is that inflation will move higher and we do reason that the inflation rate could easily burst the BOE’s target of 2% as early as the first quarter of 2017.
Sam Tombs of Pantheon Economics also reckons today’s inflation report will show that sterling’s “Brexit-driven depreciation” has pushed up prices in the shops.
And Yael Selfin, Head of Macroeconomics at KPMG, also expects CPI inflation will rise from June’s 0.5%.
Ahead of July's #inflation figures, @yaelselfin tells @SkyNewsSunrise we're likely to see inflation accelerate. pic.twitter.com/XA2D7fln9b
— Christina Bridge (@ChrisRoseBridge) August 16, 2016
Updated
The agenda: UK inflation and Bank of England QE in focus
Good morning.
We’re about to get our first piece of hard economic data since Britain’s fateful EU referendum on June 23.
At 9.30am, the UK inflation report will reveal how prices changed last month. It may show that the Brexit vote (and the consequent tumble in sterling) has now fed through to businesses and consumers.
The City expects that the consumer prices index will show prices rose by 0.5% over the 12 months to July, matching June’s figure. But some economists reckon it may rise to 0.6%, due to the weaker pound pushing up the cost of imports.
Yesterday, the pound hit a one-month low as investors hunkered down ahead of today’s inflation figure. It will be followed by unemployment data tomorrow and retail sales on Thursday.
Neil Wilson, markets analyst at ETX Capital, explains:
Bearish sentiment is building as investors look ahead to a slew of UK data that should offer a much clearer picture of how the economy has been affected by the Brexit vote.
The limited evidence so far has been pretty downbeat and point to a marked reversal of fortunes for an economy that enjoyed a very healthy first half of the year.
Tomorrow's @TimesBusiness front page: Sterling sinks as market braces for truth on Brexit #tomorrowspaperstoday pic.twitter.com/BOmIr2frCp
— Richard Fletcher (@fletcherr) August 15, 2016
Britain’s army of hard-working commuters will be particularly interested in today’s inflation numbers. The Retail Price index will be used to set rail fares for the next year.
Bad day for commuters like me as we await inflation figs & find out how much our tickets will rise next year. Rail fares up 25% since 2010.
— Jordan Newell (@jordannewell) August 16, 2016
Also coming up....
We’re actually quite spoiled for economic data this morning, with US inflation due at 1.30pm BST, followed by a report on America’s industrial sector.
Germany’s ZEW institute publishes its monthly investor confidence report at 10am BST. And there’s a new report on oil inventory levels due at some stage.
Highlights include UK and US CPI, German & EU ZEW Survey, US Industrial Production, API Crude Inventories and NZ Employment Change
— RANsquawk (@RANsquawk) August 16, 2016
We’ll also be watching the Bank of England today.
It will try to buy £1.17bn of long-dated UK government debt this afternoon, as part of its QE programme. Last week the Bank failed to meet its target, with investors unwilling to actually sell up. We’ll know by 3pm whether the BoE did better this time....
Last night, the US stock market hit yet another record high. But shares in Europe are expected to dip when trading begins at 8am:
Our European opening calls:$FTSE 6924 down 17
— IGSquawk (@IGSquawk) August 16, 2016
$DAX 10717 down 22
$CAC 4484 down 14$IBEX 8682 down 38$MIB 16972 down 26
Plus, mining groups Antofagasta and BHP Billiton and oil services firm Wood Group are reporting financial results today.
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