Inflation is moving in the right direction
The most recent inflation figures in the UK saw a fall to 6.8%, down from 7.9% from the previous release. This is good news, but it means UK inflation is still way above the Bank of England’s 2% target. So, what is the Bank of England doing to bring inflation down further?
Well, they’ve been putting the benchmark interest rate (also known as the base rate) up since the end of 2021. The base rate was last increased on 3rd August 2023 to 5.25%, and the Bank’s decision-making committee – known as the Monetary Policy Committee – is meeting again on 21st September 2023, which might result in another increase to the base rate.
These measures by the Bank of England have so far been largely successful on the face of things or at least, they’ve got inflation moving largely in the right direction. Inflation was over 11% in October 2022 for example, and the Bank expects inflation to continue to fall as energy prices come down off the back of falling gas prices. The Bank expects to hit its 2% target by early 2025 – at which point prices would still be rising, but it would be more gradual than it is currently.
BoE decision 21st September
Any inflation aficionados out there should put a big red circle around 21st September 2023 in their calendar. That’s when the Monetary Policy Committee is next expected to meet. The current steer from polling companies1 is that this meeting might see the base rate reach its peak of 5.50%.
FTSE 100 falls for the first time since May
The UK’s benchmark market index, the FTSE 100, experienced an overall decline for the first time since May 2023. The index fell by 2.63%2 in August 2023, which isn’t insignificant. What’s interesting is the split for the biggest winners and losers by sector. Real estate was up for the month, but miners – including industrial metal miners and precious metal miners – were down.
A variety of reasons are cited for August’s negative performance but it’s worth noting that global stocks were down for the month across the board. With 2023 as a whole having surprised investors to date with broadly positive markets, the most likely explanation for August’s negative performance is investors taking a breath and cashing in some unexpected profits. Additionally, with cash and government bonds now offering healthy nominal (before inflation) returns, there’s less need for investors to take risks in the stock market.
The FTSE 100 also welcomed Marks and Spencer – the food and clothing chain – back into its roster after a 4-year absence. The retailer has experienced a significant boost in its share price this year after a revamp of its shops and clothing range. Companies can be added to or fall out of the FTSE 100’s roster quarterly, and it’s a capitalisation-weighted index – which means that the FTSE 100 includes the 100 largest companies listed on UK stock exchanges according to their market capitalisation.
Good news story: wages are up
Staying in the UK, wage inflation – that’s the rate at which wages are rising – is up. As opposed to consumer price index (CPI) inflation, wage inflation going up isn’t a bad thing; it means that wages have increased. The thing to note though is that wage inflation is still below CPI inflation.
This leads us nicely to the theory of the wage-price spiral. The idea is that price increases (inflation) are a result of higher wages (wage inflation). In essence, the theory goes, as more people earn more money, the demand for goods and services increases – which means that the cost of certain things might also increase. So, while people are earning more, things are more expensive and people aren’t necessarily ‘better off’.
This might become a problem over the long term, especially for the Bank of England. That’s because the Monetary Policy Committee might need to start giving more attention to wage inflation alongside CPI inflation when making interest rate decisions – which adds another layer to an already complex economic situation.
2 Google Finance, 1 August to 1 September 2023
