There was good news on inflation in June in both the US and, at last, the UK, with the rate coming in below expectations. However, June’s headline inflation of 3 per cent in the US then inched up to 3.2 per cent in July, a risk that was behind the Federal Reserve’s decision to increase rates by another 0.25 per cent ahead of the July inflation release. It remains concerned about the economy’s strength and the tight labour market. The Fed is also wary that as we head towards the year-end, the “base effect” of high inflation in 2022, which has helped bring down inflation in recent months, will work against it. In the UK, as expected, the Bank of England followed June’s 0.5 per cent hike with a further 0.25 per cent on 3 August. As retail energy prices dropped in July, there was further good news at the headline level this week. The Bank of England will want to see similar progress in the core numbers but they remained high.
A good month for financial markets
Although the fight against inflation isn't over, we are at the beginning of the end. The markets seem to think so. Commodities were strong, with Brent crude up 13 per cent to $85 a barrel. Copper, zinc, nickel, aluminium and platinum were up between 5 and 8 per cent. Equities did well, with the Hang Seng up 6.1 per cent, the Italian MIB 5.3 per cent, Nasdaq 4.0 per cent, S&P 500 3.2 per cent, DAX 1.9 per cent and CAC 1.4 per cent. In the US, there was a broadening out of the market with smaller companies starting to do better; the Russell 2000 Index was up 6.1 per cent. In the UK, the FTSE All-Share (TR) Index gained 2.6 per cent, but encouragingly the FTSE 250 was up 4.1 per cent and FTSE Small Cap (Ex-Investment companies) 3.9 per cent. The FTSE Aim All-Share continued to struggle, but was up 1.6 per cent. Of the major equity markets, the Nikkei 225 was the only one in negative territory, falling just 0.1 per cent.