Has eurozone inflation shot even higher?

Has eurozone inflation shot even higher?

Can inflation maintain its record-setting pace in the euro area even though the economy already seems to be contracting and economists are widely predicting a recession this winter?

The latest test will come on Friday, when the European Commission’s statistics arm will release eurozone inflation data for September. Economists polled by Reuters expect consumer price growth to have hit 9.6 per cent on an annual base, up from the all-time high of 9.1 per cent set only in August.

Prices of oil, steel, wood and many other commodities have fallen for several months. But this is being offset by persistently high energy costs, which are hitting both manufacturing and services companies and prompting them to raise prices.

Another factor likely to lift inflation is the expiry this month of Germany’s temporary measures to cushion the impact of high prices, such as a fuel duty cut and a subsidised €9 monthly train ticket.

Deutsche Bank economists forecast last week that eurozone inflation would peak at the end of the year around 9.5 per cent. Price pressures also keep rising as European wholesale natural gas prices remain about two and a half times higher than a year ago, even after a recent dip.

The European Central Bank, which has already raised interest rates by 1.25 percentage points over the summer, will be watching the latest data carefully as it considers how high to lift borrowing costs to bring inflation back to its 2 per cent target.

Isabel Schnabel, an ECB executive board member, underlined its concern last week, saying: “What we are seeing is that the inflationary pressures have become much more broad-based. They have somehow crept into all parts of the economy.” Martin Arnold

How have higher interest rates affected the UK mortgage market?

Rising interest rates are expected to continue to take the wind out of the UK housing market’s sails, as they make mortgages more expensive.

Those increasing costs come just as the UK average house price has reached an all-time high, following the pandemic-induced housing boom and against a backdrop of falling real (inflation-adjusted) income.

The Bank of England releases its latest credit and mortgage data for August on Thursday. Economists polled by Reuters forecast that UK mortgage approvals dropped to 62,000 last month from 63,770 in the month before and down from their peak of more than 100,000 in November 2020.

Last week, the BoE announced another 0.5 percentage point increase in its key policy rate to 2.25 per cent, the highest since 2008, marking its seventh consecutive rate rise.

Mortgage rates have risen as a result.

“We expect that the sharp move higher in mortgage rates fuelled by the Bank of England tightening monetary policy will continue to weigh on mortgage approvals,” said Ellie Henderson, economist at Investec.

In contrast, UK house price growth has remained solid, supported by a limited stock of properties.

The downward trend in mortgage approvals will probably be affected by the stamp duty cut announced by the government on Friday, with no stamp duty to be paid on the first £250,000 of a property’s value, up from £150,000. The threshold is increased to £425,000 for first-time buyers.

Rightmove housing expert Tim Bannister said that while activity has been softening Friday’s announcement could “lead to a big jump in prospective buyers competing for the constrained number of properties for sale”, resulting in higher house price growth. Valentina Romei

Did US consumer spending rise in August?

US consumer spending is expected to have increased in August, with the commerce department’s personal consumption expenditures index forecast to post a monthly increase of 0.2 per cent, according to a Reuters poll.

That follows a 0.1 per cent bump, which missed economist expectations for a 0.4 per cent increase. July’s cool spending reading was driven by a reduction in consumption of goods and a modest increase in spending on services.

The shift towards spending on services could reverse a trend throughout much of the pandemic that fuelled rises in price for goods. That would be a welcome development for the US Federal Reserve as it attempts to tame inflation that has been hovering around its highest level in four decades.

“Consumer spending is in the midst of an ongoing but still incomplete rotation back toward pre-pandemic patterns,” Fed vice-chair Lael Brainard said in a speech this month. “Even so, the level of goods spending remains 5 per cent above the level implied by its pre-pandemic trend, while services spending remains 4 per cent below its trend.”

LPL Financial chief economist Jeffrey Roach said the Fed, through its primary monetary policy tool of interest rates, is targeting aggregate demand. “The Fed has zero power over any supply components of inflation,” he said, and although supply chain constraints had begun to ease, it would take time to filter through to retail consumer prices.

Recent data showed that US retail sales in August unexpectedly increased 0.3 per cent, surpassing economist expectations for a flat reading. The figures are not adjusted for inflation, but the absence of a large drop suggests consumers overall are still spending.

However, the retail control group, which excludes purchases of petrol, motor vehicles, building materials and food services, was flat. This group feeds into the official gross domestic product calculation. The soft figure resulted in the Atlanta Fed cutting its GDPNow tracking estimate for third-quarter GDP growth to 0.5 per cent from 1.3 per cent.

Lydia Boussour, lead US economist at Oxford Economics, still expects modest growth in consumer spending in the third quarter.

“Continued modest growth in consumer spending in Q3 should be followed by a significant slowdown in Q4 and some retrenchment in spending in the first half of 2023 as weaker labour market gains curb income growth.” Alexandra White

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