Written by Shane Balkham.

Inflation continues to dominate investors thoughts and last week we had the UK’s rate of inflation climbing to 10.1% for July on an annualised basis, the first time the measure has registered a double-digit increase in more than 40 years.  Prices rose 0.6% in the month of July, driven by the persistent increases in energy and food.  Food inflation recorded 12.7% in the month of July, the highest rate for more than 20 years.

This data will certainly increase the resolve at the Bank of England to continue along the current path of interest rate hikes.  Expectations for a further 0.5% hike at the next meeting have solidified.  The quarterly analysis from the Bank of England in its Monetary Policy Report published at the beginning of the month, projected inflation to creep higher, with energy prices poised to soar with the energy price cap set to increase in October.

The situation continues to be highly politicised and whoever ascends to become Prime Minister will have to take measures to ease the pain being felt by consumers.  This could mean using fiscal measures to subsidise fuel costs, while simultaneously tackling headline inflation. This scenario will undoubtedly add further pressure to an already stressful Bank of England.

The Bank of England is not alone.  The minutes from the Federal Reserve’s meeting in July indicated that the Central Bank would continue to prioritise the fight against inflation ahead of economic growth for as long as it would take.  Signals have become mixed, with the US inflation measures falling in July and the Federal Reserve minutes confirming a strong line on the battle to control inflation.

Even if elements of the inflation make-up are seeing signs of reducing pressure, it is clear that central banks will remain focused on fighting inflation, as they continue to play catch-up on a situation where they were caught sleeping.  Cognisant of the ghosts of the past, central banks will not want to stop the rate hiking cycle too early and risk losing the loose grip they are perceived to have on inflation.

The end of the summer will be monitored closely, with the central bank committee meetings in September and the economic symposium in Jackson Hole, Wyoming next week.  A political autumn of discontent with inflation to fight and a recession to avoid?

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