Inflation Falls ... Sterling takes a hit ...

Inflation falls, Sterling takes a hit. The headline rate of inflation CPI fell to 2.4% in April from 2.5% in March. Sterling closed lower against the Dollar. Prospects for a UK base rate rise  faded. The Pound eased to $1.33 against the Greenback and eased to €1.14 against the Euro.

Will inflation fall further this year? it may be difficult. Energy prices are rising as Sterling falls. Import prices are rising again. The May headline figures were flattered by a fall in service sector inflation. Goods inflation remained at 2.6% but service sector inflation fell to 2.1%. Is this sustainable? I doubt that.

Taking a holiday this year? Package holiday costs were up by almost 5%. Want to read a book, while away? Book prices were up by 11%. House Contents insured during the trip? Of course. That will be 9% more this year. Thanks!

Petrol costs were up by 23% in the month. The largest downward contribution came from Easter apparently. So much for seasonal adjustment. Producer costs are on the rise. Input prices were up by almost 6%. Crude oil prices were up by 20%. Imported metals and fuel costs were significantly higher. So will inflation continue to fall during the year? Don't be deceived by the April shower. Inflation will still be near 2.4% by the end of year. At least one rate rise this year, should still be priced in.

Inflation Forecasts are too optimistic. The rate will stay around 2.4% by end of year.

Good news for the Chancellor this week. Borrowing in the first month of the financial year fell by over £1 billion. Government borrowing was just £7.8 billion compared to almost £9 billion last year.

In the last financial year, total borrowing was revised down again to £40.5 billion. This makes nonsense of the forecasting performance of the Office For Budget Responsibility. In January the OBR were still expecting an out turn of around £50 billion. Oops!

For the current year, we expect borrowing to fall further to around £32 billion. Growth forecasts may be revised up this year to 1.8% from 1.5%. Nominal GDP growth will be around 3.8%. The tax take will be boosted, as austerity continues. The absolute level of debt will continue to rise to £1.8 trillion by the end of the financial year. No end to austerity in sight. No austerity holiday. The package price remains too high for Spreadsheet Phil. [So early in the mid terms at least].

We expect borrowing to fall to around £32 billion in this financial year.

The Bank will act if Brexit is a shambles. This, the reassuring message from the Governor.  In a speech this week, Mark Carney explained a "disruptive" Brexit would give the British Economy a very nasty shock.

If that were to be the case, the Bank of England would do its job and guarantee monetary and financial stability in the UK.  We have the tools to do the job. Excellent. Negative rates and more QE? Bring it on ...

Carney "We have the tools to do the job ..."

Will Brexit be disruptive? Michel Barnier today warned Britain to stop playing "Hide and Seek". That's "Masquer and Chercher" in French. An option to "Chercher La Femme" ... "Find the Lady" who can do a deal perhaps. The EU's chief Brexit negotiator says the UK "must look the reality of the EU in the face".
It's a fair point.

CU Plus or Max Fac X. There is little point in a divided cabinet, devising models of co-operation, completely unacceptable to the EU. The Irish Border, the ECJ, the fundamental freedoms, all must be addressed, if a reasonable solution is to be achieved.

Barnier explains, "The UK must refrain from attempts to recreate the advantages of a shared regulatory system from the outside."  "It is the UK that leaves the EU. Britain cannot on leaving, ask us to change who we are and how we operate." Ouch. Over in the USA ...

U.S ten year bond yield close below 3%

In the U.S. ten year bond rates closed just under 3% this week. The Fed minutes were pretty ambivalent.

"The committee expects that economic conditions will evolved in a manner that will warrant further gradual increases in the fed funds rate; the rate is likely to remain for some time, below levels that are expected to prevail in the long run. However, the actual path of the fed funds rate will depend on the economic outlook as informed by the incoming data." Central bank speak.Yep.

Jerome Powell Chairman of the Federal Reserve is taking tips from Governor Carney perhaps. Talk of an inverted yield curve, a height to heady for market analysts. Forward guidance forgotten. A tool now discarded. Thrown out of the central bank tool box. So what of central bank independence?

Central Banks should not take independence for granted said the Fed Chair in a speech in Stockholm this week. Central bankers should remain independent from political pressure. This enables them to to make unpopular decisions in the economy's long run interest. Raising rates to curb inflation. Turning a deaf ear to political leaders. Blocking Presidents on Twitter. That sort of thing. No one specifically in mind. Just a point in general to be made ...