Issue of the week: the US inflation shock
Shattered expectations of US rate cuts are bad news for politicians too
JPMorgan boss Jamie Dimon’s annual letter to shareholders last week “struck an ominous note”, said Lex in the FT – predicting that “big picture mega-forces portend expensive money for an extended period of time”. It may no longer be a case of “higher for longer” when it comes to interest rates, he said, so much as “higher forever”. Bang on cue, the latest set of inflation figures – showing a 3.5% rise in consumer prices for the year to the end of March – shocked traders. The figure was high enough to “chill” the hope previously telegraphed by Fed chairman Jay Powell that several rate cuts were on the cards this year. As well as hitting stocks, the news had a knock-on effect on US government bonds – yields on two-year Treasury notes are now approaching 5% – and the dollar, which hit a five-month high, and a 34-year high against the weakening Japanese yen.
Even without the troubling news from the Middle East, it was enough to roil markets globally, said The Times. If higher US rates continue for a prolonged period, warned IMF chief Kristalina Georgieva, the global economy will face a decade of sluggish growth. Prepare for the “tepid Twenties”. In the short term, sticky US inflation will have a big effect on American pockets, said Gerard Baker in the same paper. And, in an election year, that doesn’t bode well for Joe Biden. The president keeps insisting that “the US economy is in fine fettle”. The claim “has some merit” by global standards: since the pandemic, America has enjoyed the fastest rate of growth of all the major economies. But that isn’t too hard, given that Europe has been in recession and China has stalled. Although US inflation has retreated dramatically from its 40-year high in 2022, prices are now still 20% higher and, for most people, incomes have barely kept pace. There should be no mystery about why voters are unhappy: “It’s the prices, stupid.”
Although March’s UK inflation figure (at 3.2%) wasn’t as low as some economists expected, “Britain is starting to rein in inflation at a quicker pace than the US”, said Philip Aldrick and James Hirai on Bloomberg. This may enable the Bank of England “to move sooner on cutting interest rates”. Don’t count on it, said Jeremy Warner in The Sunday Telegraph. “Give growth a chance” and get on with the cuts, shout the BoE’s critics. But as long as the Fed “has its foot on the brakes”, there’s a limit to how far the Bank can diverge. That would risk “a flight of capital to the higher interest rate environment of the US”, which would weaken the pound, and possibly “cause inflation to rise anew”. If Rishi Sunak was banking on a sustained fall in interest rates to boost his electoral chances, he had better think again.