Take Two: US inflation data suggests aggressive Fed hike; EU plans energy response

What do you need to know?

US inflation eased slightly in August, but prices still rose more than expected, prompting renewed anticipation that the Federal Reserve (Fed) will announce a third 75-basis-point interest rate rise this week. Annual inflation was 8.3% in August, down from 8.5% in July – largely reflecting lower petrol costs – but core inflation rose unexpectedly to 6.3% from 5.9%. Elsewhere, UK inflation eased to 9.9% in August from July’s 10.1%, while the Eurozone number was confirmed at 9.1%. US equities slipped after the US inflation release, but the S&P 500 made a partial recovery and was down 2.57% over the week to Thursday’s close. The MSCI World Index was down 1.65%.¹

Around the world

European Commission President Ursula von der Leyen proposed measures to lessen the influence of gas on the electricity market and raise €140bn from a windfall tax on fossil fuel firms. Those funds would be used by national governments to help people and businesses struggling with higher energy costs prompted by Russia’s invasion of Ukraine. The announcement came as a Ukraine counter-offensive saw it reclaim large areas of land in the north-east of the country. During the week European benchmark gas prices moved back to lows last seen in July and were well below the highs of late August.

Figure in Focus: $12tn

The global transition to green energy could save as much as $12tn by 2050, according to a study by Oxford University. The estimate is based on projections of the falling cost of renewable technology relative to fossil fuels. The last few decades have seen solar and wind energy costs decline by almost 10% a year while fossil fuel prices have continued to face market volatility and inflation. The study predicts that public policy support, the growth of green technologies and soaring energy prices will allow the cost of renewables to improve at a faster pace than previously anticipated.

Words of Wisdom:

Quantitative tightening (QT): The practice of reducing a central bank’s balance sheet and effectively taking liquidity out of the economy. The Fed, Bank of England and Bank of Canada are using QT as part of their efforts to tackle rampant inflation, allowing the bonds it holds to mature without replacing them. Reports have suggested the European Central Bank may start discussing QT in October. It is the reverse of the now well-known practice of quantitative easing (QE), which has supplemented monetary policy easing since the 2008 financial crisis, and seen central banks buying bonds to reduce yields and stimulate economic activity.

What’s coming up?

Monday is a public holiday in the UK and a number of other countries due to the funeral of Queen Elizabeth II. Several major central banks meet to set interest rates this week, starting with the Fed on Wednesday and the Bank of Japan and the Bank of England on Thursday. Economic data released this week includes Japanese inflation on Monday while Canada reports its latest inflation figures on Tuesday. On Friday, Purchasing Managers’ Indices are reported for the Eurozone, UK and US. Italian voters go to the polls on Sunday for the country’s General Election.