Investors got a nasty shock last week, finding out that prices in the US rose faster than expected in January – a fact that American consumers were likely already aware of. On a year-over-year basis, overall consumer prices jumped by 3.1%, down from December’s pace, but still hotter than the 2.9% forecast by economists. Core inflation, which excludes volatile food and energy items, frustratingly remained flat at 3.9%, thanks to some still-savage gains in housing costs. Even more worrying though was the fact that core inflation actually heated up on a month-over-month basis, suggesting that the Federal Reserve just might have to wait a bit longer before it takes a knife to interest rates.
Brits were probably happy at the end of last year, bringing home a little more bacon than expected. Average annual growth in regular UK earnings (not counting bonuses) was 6.2% for the October to December period. That was less than the 6.7% pace from September to November, but more than the 6% forecast by economists. It’s good news from a payday standpoint but could be bad news from an interest rate standpoint. The Bank of England (BoE) believes it’ll be harder to return inflation to its 2% target if pay raises lead companies to pass higher wage costs onto consumers.
Britain’s central bank did get some good news last week though, with the latest inflation report showing the pace of price gains holding steady in January. Consumer prices rose by 4% last month from a year ago – less than the 4.1% forecast. And although services inflation – a closely watched measure of homegrown price pressures – accelerated to 6.5%, that was less than the 6.6% predicted by the BoE. And that happy news prompted traders to increase their bets that the central bank will start lowering its 5.25% benchmark interest rate this summer.
And a gloomy report about the health of the British economy only bolstered those rate-cut expectations. The UK economy slid into recession at the end of 2023, shrinking by a worse-than-feared 0.3% in the fourth quarter, compared to the one before. That poor showing followed a 0.1% decline in the third quarter, and meant that the British economy grew by only 0.1% during 2023 – the slowest annual expansion since 2009 (not counting Covid-afflicted 2020). And the BoE anticipates that sluggish pace to continue, forecasting a measly 0.25% for 2024.
Not wanting to be outdone, Japan unexpectedly slipped into recession at the end of 2023 too. The Land of the Rising Sun saw its economy shrink by 0.4% on an annualized basis last quarter – stunning economists who had predicted growth of 1.4%. The contraction, mainly the result of massive cutbacks in spending by households and businesses, was actually an improvement over the 3.3% annualized drop in the third quarter – albeit a dreary one. The disappointing state of domestic demand will complicate matters for the Bank of Japan (BoJ), which is talking about putting an end to its negative interest rates by raising borrowing costs for the first time since 2007.
