WeeklyWatch – UK and US inflation figures fall slower than expected amid lower consumer spending

21st February 2023

Stock Take

Decrease in US inflation figures comes to a halt

Since the beginning of 2023, assumptions have largely been that Western inflation figures will decline steadily over the rest of the year. But last week revealed that some challenges remain.

Core Consumer Price Index (CPI) inflation in the US decreased by 0.1% to a new rate of 6.4%, according to newly released data. This was below the predicted 6.2%.

This, somewhat unsurprisingly, assisted in holding US equities back. The S&P 500 ended the week down for the second week in a row, after falling the week before as a result of many large businesses reporting weaker-than-expected results.

Used car prices continue to decline

Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, cautioned that more short-term problems persist:

“Used vehicle prices fell 1.9%, the fourth straight hefty decline. But a temporary reversal of the downward trend is looming, in the wake of the 2.5% spike in auction prices in January, that will feed into the CPI in February and/or March.

“The story here, we think, is that a surge in used vehicle sales in January, due to the much milder-than-usual weather – we already know that new vehicle unit sales jumped 18% month-to-month – forced dealers to turn to auctions for inventory, so prices spiked. This won’t persist, given that supply is improving and auto dealers’ margins are still hugely overextended, but it does pose a near-term threat to the CPI.”

A combination of stronger-than-anticipated retail sales and inflation figures will have given the Federal Reserve the justification it needs to take a harder stance on interest rates at its upcoming meeting.

Falling UK inflation and lower consumer spend

Inflation dropped from 10.5% in December to 10.1% in January in the UK. Although still strong, this fell short of the 10.3% market expectation. While this makes for hopeful reading, the UK faces significant economic hurdles and is expected to significantly underperform its G7 peers in the subsequent quarters.

One factor, according to Felipe Villarroel, Partner at TwentyFour Asset Management, is that UK consumers are more cautious with their spending than their American counterparts. He points out that UK consumers today have significantly greater savings percentages and less outstanding credit card debt than US consumers, where personal consumption generally makes up close to two-thirds of total demand in developed economies. Villarroel says:

“To be clear, we do not think the US consumer is in bad shape or irresponsibly spending its savings stack at this stage. But it is worth highlighting that part of the reason for lower UK consumption is an abundance of caution from the country’s consumers.”

The next Bank of England Monetary Policy Committee (MPC) meeting, at which interest rate adjustments are decided, isn’t scheduled to take place until late March – on the same day as the release of February’s inflation data. This indicates that the MPC’s next decision will probably be positively impacted by these January figures, which, according to observers, will increase the MPC’s confidence in its predictions that CPI inflation will fall quickly back to the 2% target over the following 18 months.

How UK and US stocks compare

The FTSE 100 Index increased 1.6% by the end week overall. The index crossed over the 8,000 threshold for the first time last week thanks to recent weeks’ robust performance, which enabled it to hit all-time highs.

The S&P 500 and FTSE 100’s contrasting recent performances highlight the fact that equity markets don’t always move in perfect sync with the larger economy. While most predicted that the US economy would perform better than the UK’s, in this instance, the UK index has outperformed its American equivalent. This can be somewhat explained by the fact that American consumers are spending more and driving economic growth, albeit at the cost of increased inflation.

Wealth Check

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1 Reaching Resilience: The Role of Protection in Building Financial Resilience, LV=, January 2023 (from a survey of 4,000 nationally representative UK adults).

The Last Word

“Giving absolutely everything of yourself to this job is the only way to do it. The country deserves nothing less. But in truth that can only be done, by anyone, for so long.”

Nicola Sturgeon announces her resignation after eight years leading the Scottish National Party.

TwentyFour Asset Management is a fund manager for St. James’s Place

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SJP Approved 20/02/2023