Inflation in the United States rose more than expected last month to 3% – exactly the same rate as here in the UK, funnily enough!
‘Unpredictable’ best describes the start of Donald Trump’s presidency as his proposed tariffs on imported goods look likely to push up prices for American consumers.
The rate of inflation ‘over there’ rose to 3%, more than the 2.9% anticipated by economists and the highest it has been in six months.
As a result the US central bank (the Federal Reserve) chose not to cut interest rates in January, leaving them at 4.5% (the same as the UK) and some analysts believe there won’t be any cuts to the US rate this year.
The standard tactic for central banks, including our own Bank of England, is to increase interest rates to reduce inflation and to decrease them when inflation falls, as a means of stimulating the economy.
It is an ongoing balancing act but typically a higher cost of borrowing (interest rates) is not good for economic growth – businesses cannot afford loans for expansion, high mortgage costs inhibit the housing market and so forth. Of course, there are other considerations too – such as protecting your home currency if it is under attack and the confidence sentiments which action or inaction relay.
What does it all mean for us here in the UK? When the US, the largest economy in the world, is struggling it will likely have a knock-on effect for economies around the globe.
That’s not to say there won’t be opportunities within that for us but the interlinked nature of the global economy means very little happens in isolation these days.
Then there is the spectre of trade tariffs – so far there has been little detail on what may be levied on the UK by the US but higher tariffs mean higher prices for exporting our goods, less money coming back into UK as a result and on retaliation, inflationary increases in what we import, which will hinder our growth.
Our own economy is showing very little growth, with fears higher unemployment and price rises will lead to ‘stagflation’, as we discussed in this column a couple of weeks ago, meaning economic stagnation on one hand and high inflation on the other, bad news for any economy.
Then there is the war in Ukraine, which could yet still destabilise the markets and global economy even further, as each day sees a new twist in the saga.
That dreadful war has to end but within a week we have seen Ukraine tentatively willing to accept a peace deal brokered by President Trump in return for some considerable remuneration from the country’s mineral wealth, to an all-out war of words between President Zelenskyy and President Trump.
The crisis seems to change daily and no doubt by the time you read this some new twist will have emerged and we fear this will go on for many weeks and months yet.
Meanwhile the UK and European governments are scrambling to try and make sense of it all and react rather than plan coherently – we certainly hope things settle and an equitable and lasting peace can be achieved.
The US markets are still doing rather well off the back of recent record highs, with European and Asian markets less so but generally stock markets do not like uncertainty and concerns over trade tariffs and the ‘geopolitical situation’ may yet upset the apple cart.
What can you do about all this? Very little unfortunately but as ever our advice during times of volatility is to avoid making knee-jerk investment decisions in response to global events and to ensure you have spread your eggs widely – and to discuss any concerns or potential plans with your independent financial adviser first.
