A positive week for markets as investors digested a raft of corporate earnings and the European Central Bank raised interest rates for the first time in 11 years. The 50 basis point increase brought to an end the controversial policy of negative interest rates.
On Wednesday, the Office for National Statistics released the UK inflation figure for June. It showed that prices continued to climb at an annual rate of 9.4%, the highest in 40 years and greater than the 9.3% analysts had expected. Prices rising faster than anticipated increases the chances of a bigger interest rate rise when the Bank of England meets next on the 4th August.
The worry for policymakers is the possible second-order effects as inflation becomes ingrained in the public minds and they start to demand higher wages to compensate for rising prices. Central bankers are hoping that they can reduce consumer demand and bring inflation under control by hiking interest rates sharply before this wage spiral can gather pace.
The difficulty they face is that many of the forces behind the recent inflation pressures are outside of their control. With the energy price cap due to increase again in October, economists are forecasting that this could push inflation to a peak of 11% in the UK towards the end of the year.
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John Naylor, Chartered FCSI – Head of Investment Committee