Written by Shane Balkham

Inflation concerns are still the hot topic for investors, politicians, and policymakers.  The US published its inflation data last week for April and it was a mixture of good and bad news.  The relatively good news was that the headline Consumer Price Index (CPI) fell from an annual rate of 8.5% to 8.3% and that core inflation, a measure that excludes certain volatile and seasonal prices such as energy and food, fell from 6.5% to 6.2%.

The bad news was that these data points were still higher than markets had expected.  The decline in used vehicle prices helped the reduction in core inflation, however services inflation picked up, showing demand shifting from goods to services.  It is the uptick in the stickier parts of the inflation basket that will be of greatest concern to the policymakers within central banks.  With the next policy meetings for the Federal Reserve and the Bank of England just four weeks away, one month’s worth of data showing a slight downturn will not be sufficient for policymakers to change their current course of interest rate hikes.

In the UK, the Bank of England Governor Andrew Bailey will be meeting the Commons treasury committee today, ahead of the UK’s inflation data which is due to be published on Wednesday.  Expectations are for April’s inflation data to show another sharp increase in prices and add pressure on the Government to help ease the spiralling rise in the cost of living.

Inflation has become a political hot potato and Governor Bailey can expect a hostile reception from MPs, who will want some reassurance that the independent central bank has control over the path of prices.  The Bank of England considers inflation to be less entrenched than in the US and that price rises will slow as the economy contracts later in the year.  That is a difficult narrative to promote when they also think that this temporary level of inflation has yet to reach its height of 10% in the coming months.

One country that does not have a rampant inflation problem is China, with headline CPI @2.1%, year-on-year for April 2022.  China’s core inflation dropped to 0.9%, evidence of weaker demand as China continues its zero-tolerance policy for COVID-19.  Retail sales have dropped over 11%, year-on-year in April, highlighting the toll that lockdowns are having on Chinese growth.

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