Surprising decline in UK inflation

This morning’s UK CPI data for August revealed a surprising further decline in annual inflation, from 6.8% in July to 6.7%. Because of the recent increase in gas prices, economists had anticipated a rise in inflation, but other variables more than countered that. As a result, the core rate of inflation (excluding food and energy) dropped significantly from 6.9% in July to 6.2% today.

The data released today will undoubtedly increase suspicion that UK interest rates are approaching their peak and that the Bank of England’s rate decision tomorrow will be considerably closer than previously thought.

US FED expected to leave rates unchanged

It is expected that the US Federal Reserve will hold interest rates steady today, marking the second pause this year. Given previous statements by policymakers, markets undoubtedly believe that a raise is unlikely. The pause appears to be almost certain because prior announcements have demonstrated that the Fed dislikes to surprise the markets with its swift rate decision.

 Since markets have already priced in no change, it may be more important to see if the guidance on future action signals anything new, particularly with regard to whether rates have peaked and how soon they are expected to be dropped. This will be indicated by changes to forecasts made by policymakers as well as by the statement and Fed Chair Powell’s news conference.

Powell’s main takeaway is probably that, even if they are winning the war on inflation, there are still risks, as evidenced by the increase in headline inflation from last week. As a result, he is unlikely to predict that US interest rates have peaked or that a decline is imminent. One more rate hike was projected for this year in the most recent batch of dot plot projections, and Fed policymakers are unlikely to want to remove it at this time.