This week in the markets: inflation focus

It’s a quiet week on the data front and earnings season is all but finished. But that doesn’t mean there isn’t plenty to keep an eye on. This week attention is focused on inflation on both sides of the Atlantic.

The final mile is the hardest

Inflation has come down rapidly in both the US and over here in Europe. But the final push towards the 2% target shared by central banks on either side of the pond is proving to be the hardest part of the journey. Here in the UK, inflation emerged last week at 2.3%, well down from the October 2022 peak of 11.1% but higher than expected, with worrying signs of persistent rises in wages and service sector prices.

In the US, too, inflation retreated rapidly to just above 3% but it has stayed there throughout the year to date and the Federal Reserve is understandably sitting on its hands until it’s clear that price rises are indeed falling back to target.

This week, we get a few insights into the current path of inflation. The main focus will be on Eurozone inflation, ahead of next week’s meeting of the ECB, which many are looking to for the first rate cut in the current cycle from a major central bank. Christine Lagarde said recently that there was a good chance that June 6 would see a cut in borrowing costs in Europe.

Unfortunately, it looks like this week’s inflation reading could follow the US’s lead in showing a modest uptick in the rate of price rises to 2.5% (from 2.4% a month ago). Unfavourable energy comparisons and last year’s launch of subsidised travel in Germany are to blame. Whether that stays the ECB’s hand next week remains to be seen.

Meanwhile, in the US later this week the Fed’s preferred inflation measure - the personal consumption expenditures index - is expected to flatline at 2.7%. A couple of weeks ago the headline CPI reading was broadly flat at 3.4%. It seems unlikely that the Fed is going to feel the need to cut rates any time soon and perhaps there will only be one cut in 2024.

And finally on the inflation front, the UK saw an easing in shop price growth this week from 0.8% annualised a month ago to 0.6%. Cheaper furniture and other non-food items are keeping a lid on price rises as retailers try to encourage nervous shoppers to open their wallets. The 20% rise in prices since the pandemic, without a commensurate increase in wages, together with higher mortgage costs, is eating away at consumer confidence here in the UK.

Dr Copper

One commodity where inflation is hard to ignore is copper. Already up 20% this year to a new high of $11,000 a tonne, the red metal looks like it could be in the early stages of a multi-year upswing as rising demand bumps up against inadequate supply. Copper is a key metal in the energy transition and in electric vehicles. Because of this, demand is set to keep rising for years to come but miners have for years failed to increase production in line.

The nature of commodity markets is that this kind of supply/demand set up can lead to big price swings before supply comes on stream again. It can take 15 years to develop a new copper mine. That’s what’s encouraging some traders to make punchy bets on the future price of copper. One hedge fund manager, Pierre Andurand, last week said he thought copper could almost quadruple in the next few years to $40,000 a tonne. The metal looks like the best way to play the journey towards a net zero world.

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