US inflation sticks at 3.7%; UK economy grows in August but recession fears linger – business live | Business

Marcus Brookes, chief investment officer at Quilter Investors, argues that the Federal Reserve should allow its interest rate increases to work their influence on the US economy and bring inflation lower.

Following today’s inflation report, Brookes explains:

“US inflation held at 3.7% in August, following a slight uptick over the summer, while core inflation increased by 0.3%. Despite its refusal to budge more recently, the US remains in a much better place in the battle against inflation compared to other developed economies, and it is from this position of strength that its economy has been able to resist any recessionary prediction to date.

“However, just as markets were concerned when inflation spiked last year, they will be equally as concerned about the future path of inflation and what happens next. As inflation has come down, it has become incredibly stubborn once again and is not likely to reach target for some time. This leaves the Federal Reserve in a tricky place once again. It wants inflation to come back to target, but as it is likely to persist above that level for some time, what can it do? One option it has been mooting is to act now and carry out another interest rate rise this year, but risk overcorrecting. Or it can wait and continue with this higher for longer message that has spooked markets in recent weeks, but risk moving too slowly.

“The current level of interest rates and the speed in which they have been raised should be enough to bring inflation back down, and given the lag effects of monetary policy it needs to be given a chance to work. Clearly geopolitical issues of recent weeks could have an inflationary impact and thus will need to be watched closely, but for now the contagion effect is low.”

At 3.7% in both August and September, the US enjoys lower inflation rate than many other advanced economies.

In the eurozone, inflation dropped to 4.5% in September, down from 5.3% in August.

The UK’s September inflation report is due next week; UK CPI was 6.7% in August.

On US inflation, Richard Flynn, managing director at Charles Schwab UK, says:

“Today’s figures show that the rate of inflation remains stable compared to last month. While the lack of a fall in the rate may be disappointing to the Fed, it is likely not surprising following last week’s jobs report which showed that the labour market remains hot – a factor that can put upward pressure on prices.

As for how this will impact interest rates, at this point, “higher-for-longer” may be more important than “how high?”. Whether or not the Fed opts for hikes, it’s unlikely we’ll see rates drop below where they are for as long as the inflation dragon proves difficult to slay.”

US inflation sticks at 3.7%

Getting back to this morning’s UK GDP report… the arts, entertainment and recreation sector had a tough August.

Activity in this part of the economy fell by 7.4% in August, the Office for National Statistics reports.

That made it the worst-performing part of the service sector.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says bad summer weather hit the sector:

As the rain continued though August, combined with a squeeze on budgets August proved to be a very dismal month for the arts, entertainment, and recreation industry. Overall activity in this sector of the economy fell by 7.4%.

Downpours disrupted festivals and outdoor arts events and sporting fixtures, with wellies and mud a difficult substitute for hoped for sandals and sunshine.

UK high street chain Boots has just reported its tenth consecutive quarter of market share growth.

Boots, which is part of Walgreens Boots Alliance, says its retail sales grew by 11.7% year-on-year in the three months to 31 August.

Skincare sales were up nearly 25%, Boots says, adding:

The UK’s number one skincare brand, No7, was up over 20% driven by sales of the new Future Renew range, while premium beauty continued to grow rapidly with sales up 20% for the quarter.

The cost of living squeeze also encouraged take-up of Boots’ Advantage card, where active users hit a three-year high. Sales of Boots Everyday essentials products are up 25%.

Seb James, managing director, Boots UK and ROI, said:

“I am really encouraged to see continued strong performance as the work that we have done to expand our ranges, drive value and innovate in beauty seems to be resonating extremely well with customers.

We have great plans for the year ahead including our new Beauty store in Battersea, a further extension of our beauty category, expansion of our online doctor service and much more. I would like to thank the 52,000 people that make up the Boots business for the hard work and resilience that has made this possible.”

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Several economists are predicting that the Bank of England will not raise interest rates higher, following today’s GDP report.

Daniel Mahoney, UK economist at Handelsbanken, says August’s growth report reinforces the view that the UK economy is currently flatlining.

Mahoney explains:

Stagnant to slow growth is likely to be a feature of the UK economy in the short term.

We remain of the view that interest rates have peaked at 5.25% in this cycle, unless we see any surprising results from the labour market and inflation figures next week.

Julian Jessop, economics fellow at right-wing think tank the Institute of Economic Affairs, agrees that another rate rise is unlikely:

“The latest GDP data show that the UK economy is flipping between growth and contraction on an almost monthly basis.

“The economy will now probably have to grow by 0.2 per cent or more in September to avoid the first of two successive quarters of falling output that would mark a technical ‘recession’.

“At the very least, growth is currently weaker than the Bank of England had been expecting, making another interest rate hike even less likely.”