Monday 19th May 2008

Growth versus Inflation

With both the US and UK economies under inflationary pressure, Central Bankers are faced with the task of stimulating growth without yielding to high inflation.

Last weeks UK CPI data damped all sprits for a rate cut next month, coming out well above expectation at 3%. Governor King has openly acknowledged the “nice” decade is over and that in the coming months he will be forced to write an open letter to Alistair Darling, when CPI breaches the 3% barrier.

In normal market conditions news that rate cuts were unlikely would have gone on to strength sterling, however, it is a sign of current market sentiment that Sterling remained under pressure and underlines the BoE’s limited powers in manipulating the market to its ideal of low inflation and consistent growth.

The market is going to pay greater interest than usual to this month’s BoE Minutes, with analysts predicting just arch dove Blanchflower being the only member to have voted for a 25bpts cut. If one or more joined Blanchflower in voting for a cut then expectation for a cut in the coming months will swell.

We will also be steered on Wednesday to the course in which the Fed will be looking to follow after last months cut of 25bpts. At the time the Fed announced that it was going to be the last cut for several months. However, traditionally the US consumer has an almighty influence on the US economy, with analysts paying particular attention to any data that suggests that the US consumer is slowing their spending. On Friday University of Michigan Sentiment Index showed that Consumer Confidence was at a 28 year low. This compounded already gloomy US sentiment with inflationary expectation seen at 12 year highs.

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