Whatâs Going On Here?Data out on Wednesday showed that UK inflation hit double digits for the first time in 40 years last month. What Does This Mean?The prices of consumer goods and services were 0.6% higher last month than the month before, which was especially unusual given that prices generally fall in July. It was mundane things like bread, meat, and dairy products that contributed most to the increase, culminating in the highest food inflation in more than 20 years. Chaos at the countryâs airports just made matters worse, with a restricted number of flights pushing up the cost of going on vacation. All in all, consumer prices were 10.1% higher in July than they were the same time last year â well above Juneâs 9.4% and economistsâ forecasted 9.8%. Why Should I Care?For markets: A recession is a given.
Economists think Wednesdayâs data will encourage the Bank of England to hike interest rates by another 0.5% next month, with traders betting theyâll be more than twice as high by May next year. That could weigh heavily on economic growth in the next few years, which might be why investors have been ditching their short-term government bonds. That selloff pushed their yields even higher than long-term bonds, which usually pay out more given the added risk of holding an asset for longer. This phenomenon is known as a âyield curve inversionâ, and itâs historically preceded recessions with alarming reliability. And when you consider that this is the biggest inversion since the financial crisis, a downturn seems all but inevitable.
The bigger picture: Europeâs teetering.
Economists think a recession is more likely than not in Europe too, as energy shortages are tipped to push inflation even higher. Gas prices are now ten times higher than normal, and metal production facilities are at the stage where theyâre closing their doors. Thatâs only going to cause more shortages and drive prices higher still. | 