UK food inflation marches down while caution reigns over Fed decision

LONDON (Capital Markets in Africa)- There is set to be caution ahead during trading as eyes swivel to the Federal Reserve meeting, although falling inflation in the UK will provide some reassurance. Oil prices have ticked a little lower amid uncertainty over monetary policy while AI enthusiasm continues to give support to the tech sector.

UK inflation bumps down, with relief for daily shop.
With UK headline inflation taking a bigger bump down than expected on its uneven path, it’ll provide fresh relief for consumers and companies who face the unenviable task of finding new finance in an era of high borrowing costs.  Lower price rises for food and non-alcoholic drinks accounted for a big chunk of the decline, coming in at 5% in the year to February compared to 7% in January. It will bring a big dose of comfort to shoppers given the super-painful food inflation rates they were having to deal with last March when they shot up to 19.2%, the highest rates for 45 years. While the daily shop is now not quite so scary, shoppers are still having to deal with a new reality of higher prices than they were used to in the past.

Core inflation, when you strip out volatile food and fuel prices, also fell back from 5.1% to 4.5%. With the prices heading in the right direction, and not proving any more stubborn than the Bank of England predicted, the pound has not moved much, rising a little before declining and trading around $1.271. The fall in inflation is not going to mean any sharp moves from Bank of England policymakers, who are set to stay in their wait and see stance. They are likely to still want more evidence that wage growth, which is still elevated, will ramp down further before they budge and bring in a rate cut, despite the fears that it will dampen any hopes of igniting growth in the economy.

Although the Office of Budget Responsibility, the government’s independent forecaster, reckons inflation will hit the Bank’s 2% target this quarter, especially with the lower energy price cap taking effect in April, there are risks that it’ll be a short-lived dip and overall prices will take off again.

Potentially inflationary pressures ahead include the ongoing fight for talent, higher shipping costs due to Red Sea disruption, and the increase in the minimum wage, and business rates. Increasing consumer and company optimism could see spending ramp up, especially with the cuts to NI putting more money in pockets and potentially putting upwards pressure on prices. Of course, there’s a chance that consumers will stay more prudent, and pay off loans instead of splashing the cash, while others may use more generous savings rates on offer to wisely squirrel away an emergency fund. Given the uncertainty ahead, the name of the game will still be caution in the months ahead. Expectations had edged towards a cut in August, when the Bank also publishes the summer monetary policy report an in-depth view on economic conditions, but bets are likely to mount again on a first cut coming in June.

Wall Street scales fresh highs with eyes on the Fed
Wall Street scaled fresh heights as AI fervour continued amid the wait for the latest interest rate steer from the Fed. Although policymakers are largely expected to keep rates on hold, investors will be hanging on the words of Fed Chair Jerome Powell about the path ahead for monetary policy. Hotter than expected inflation readings, have pushed down market expectations for an earlier rate cut. While enthusiasm for the forecast benefits of artificial intelligence powered products and services is energising big tech, a more hawkish stance from the Fed later would be unsettling. At the moment the markets are pricing in a 55% chance that a rate cut may come in June, so any changes to the dot plot of pencilled in cuts by policymakers will be closely scrutinised.

Oil prices dip back
Amid the Fed waiting game and speculation about when monetary policy will ease, oil prices have dipped back from recent gains. Brent Crude slipped, trading around $87.1 a barrel. The stronger dollar is playing a part, due to investors re-thinking the path of interest rate cuts, as it makes crude more expensive for holders of other currencies. Still, high geo-political tensions are set to keep a floor under prices, with concerns about an escalation of conflicts in Ukraine and Gaza still front of mind.

By Susannah Streeter, head of money and markets, Hargreaves Lansdown