Cooling inflation, resilient wage growth, and the economy outweigh expectations. There are some indications that Britain has entered a rational crisis after the chaos since Donald Trump’s “liberation day.”
The problem is that good news is unlikely to last long. The decline in inflation rates more than expected to 2.6% in March provides a welcome reprieve for severe households. But it’s an increasingly rocky journey, a snapshot from the rearview mirror.
Economists are hoping that inflation will rise sharply next month. And while there is growing uncertainty about how Trump’s trade war will be hit by the British economy, the country will not flee unharmed.
April is a really bad month for families, with a rise in energy bills and numerous other regulatory prices changes, including utility and council taxes, broadband and mobile phone bills.
Most experts, including Bank of England forecasters, expect inflation to reach nearly 4% by summer.
A forecast that typically shows inflation that doubles the official bank target would give Threadneedle Street policymakers an important pause for thinking. This is why Bank Governor Andrew Bailey believes a “gradual and careful” approach is needed.
There are also signs that it may delay the rate cut cycle. The UK economy has performed stronger than feared in recent months, with a 0.5% growth in February ignores dark business research and warnings that have hit shattered consumer trusted household spending.
However, the official borrowing cost is set at 4.5%, so banks acknowledge that interest rates limit the economy. Before Trump’s trade war, a return to higher levels of inflation was expected to be temporary.
However, the outlook is rapidly deteriorating. Economists believe the worsening global background should increase the likelihood of a UK recession later this year, given the relative openness to UK trade.
There is also high degree of uncertainty about the short-term inflation impact on British consumers from Trump’s trade war.
On the other hand, the US could effectively shut down Chinese imports, leading to goods produced for the US market in the UK and other European countries, and instead lowering prices. Meanwhile, serious confusion over multinational supply chains and tariffs used at once against tarts used in several countries can boost prices.
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However, in the long run, the direction of travel is more clear. Damage to economic growth from the trade war – SAP in time as import and export activities can hamper business investments and make consumers all over the world colder.
The concern is that Trump’s growth from the trade war outweighs the risks from the small increase in inflation expected this summer.
Former Bank of England Lieutenant Governor Charlie Bean proposed to guarantee half the interest rate cuts of Jumbo at his next policy meeting on May 8th.
Financial markets reflect almost 90% chances of a quarter-point rate cut, predicting two more could follow by the end of the year.
Given the worsening global outlook, the legitimacy of banks to hold interest rates will become increasingly difficult to maintain.
