Figures To Show Another Month Of Deflation In The UK

Good morning,

Currency markets are doing their level best to put those who watch them for a living into a deep, deep sleep. Yesterday we laid out a couple of things that the market is waiting for – namely further news from the US jobs markets and the September Fed meeting – before we are likely to see another leg to these markets. For now, I’m sure we could all be doing other things.

UK set for another round of deflation

Thankfully all is not lost with the publication of the latest inflation numbers from the UK at 09.30 this morning. Readers of yesterday’s Sterling Update will know that we are expecting another fall in inflation in July, probably back into deflationary territory. As we noted the first time this happened back in April, this is no great concern and should be viewed as a positive for the economy more than anything.

A little period of ‘beneficial’ deflation – i.e. deflation in goods and services that consumers have to buy, such as food and energy – frees up for more disposable income elsewhere. It will also allow people to pay down debt and replenish savings that may have needed to be used during leaner times.

The policy response

The key for policymakers is as long as core inflation – prices without these essentials – remain strong, then the Bank of England will continue to look through these headline declines as temporary and not as a reason to adjust their position towards rate hikes.

However, that is not to say that additional disinflationary forces aren’t forthcoming. Oil remains in a downtrend, as do most commodities. Sterling is stronger than it was this time last year by over 7% on a trade weighted basis and last week’s moves by the People’s Bank of China will see lower prices sweep in from the East in the next 6 months. For now however, consumers should take the low inflation as good news and leave the worrying to the men and women on Threadneedle St.

No peace in the East

Falls on the Shanghai stock exchange are the main concern as we open up this morning. Large local Chinese brokers have resumed the financing of margin payments for investors as well as allowing short selling once again and market participants are taking full advantage. AUD, NZD, CAD and other commodity currencies are on the back foot this morning as a result.

Overnight the Reserve Bank of Australia minutes suggested that the weaker AUD is starting to have some positive effects on the Australian economy. In the minutes of the August meeting that saw rates maintained at their record 2% low policymakers noted that “economic activity had generally been more positive over recent months and that the further depreciation of the Australian dollar was expected to impart stimulus to the economy through stronger net exports.”

Have a great day.