Written by Shane Balkham

Economic data was mainly centred around the UK last week, with the latest inflation, confidence, and employment data being published for April.  The inflation rate for April came in at 9%, which was slightly below the market expectation of 9.1%, but still at a 40-year high, and it was the first month since the end of 2021 that inflation data has been lower than expected.  The monthly increase from March of 2.5% was primarily driven by the surge in energy prices as the domestic price cap was lifted by 54%.  Focus naturally moves to October, when the domestic price cap for energy is scheduled for a further rise.

To muddy the waters further, UK consumer confidence dropped to its lowest level in almost 50 years, driven down by the continuing rise in the cost of living.  The survey measures how people view the state of their personal finances and wider economic prospects, and certainly points to weaker consumer spending going forward.

It is ironic that official data showed UK unemployment falling to the lowest rates in almost 50 years to 3.7%.  In these circumstances, a strong labour market adds to the risk of higher inflation, as workers seek higher wages to combat the squeeze from the cost of living.

In the past, the Bank of England would have preferred to look through the supply shock in energy and commodity markets, however the strength of the labour market is at odds with this plan of action.  These data releases point to one conclusion and that is added pressure on the Bank of England to continue its plan of interest rate hikes in 2022.

The European Central Bank (ECB) is playing catch-up, due to not yet raising its interest rates.  Comments from François Villeroy, the Governor of the Bank of France, has created expectations of 100 basis points (1%) of interest rate hikes from the ECB for 2022.  His remarks about expecting “a decisive June meeting and an active summer” have led to the market’s conclusion.  The taming of inflation is the most significant risk to policymakers and next month’s meetings of the central banks will be closely monitored.

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