Thanks to @channel4news.bsky.social for inviting me on the show to talk about April’s inflation print.
21.05.2025 20:50
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Thanks to @channel4news.bsky.social for inviting me on the show to talk about April’s inflation print.
Policy Implications
BoE sets policy on forward looking basis, not by looking out of the window to see how economy is today
- encouraging that underlying services inflation falling, expected to return to target 2026
- risk… today’s elevated inflation gets embedded in expectations and wage demands
A closer look at data.
1. Inflation expected to be 3.3% due to many one off factors (bills, Easter timing)
2. Inflation actual was higher than expected (3.5%): small surprises across the board
3. Underlying services inflation (ex volatile, indexed and regulated prices) actually *fell* in April!
Cost of living crisis….
The Bank of England expect inflation to stay above 3% for the rest of 2025!!
At Vanguard we are a bit more optimistic, expecting inflation to drop to 2.7% by year end.
High inflation (3.5% in April) is the first item on BBC Radio 4 news this morning.
Inflation driven by increases in household bills.
Big jumps in regulated prices (gas, electricity, water, excise).
Oil prices fell but not enough to push CPI down.
Momentum of falling inflation is stuttering.
Inflation rising above 3% for the first time since March 2024.
UK inflation higher than expected in April. A 🧵
Outturn=3.5%
Expected=3.3%
Last month=2.6%
The Consumer Prices Index (CPI) rose by 3.5% in the 12 months to April 2025, up from 2.6% in the 12 months to March.
www.ons.gov.uk/economy/infl...
Anticipation builds ahead of UK CPI inflation print tomorrow.
Inflation in April expected to ⬆️
April consensus view=3.3% March actual=2.6%
Inflation target=2%
Inflation looks to be going in the wrong direction.
But April’s figure is plagued by noise…
moneyweek.com/economy/live...
US effective tariff on China=39%
China effective tariff on the US=27%
On @bloomberg.com last week talking about trade deals!
Trade deals that bring tariffs down from liberation day highs are great news. They improve the outlook.
That said RELATIVE to 6 months ago tariffs are higher. Outlook weaker.
Fed decision today
No change.
Didn’t really learn much about where next.
We heard a lot about uncertainty.
We heard the risks were to the upside on inflation and unemployment.
Dual mandate pulling in opposite directions.
www.cnbc.com/amp/2025/05/...
News: US NFP =177k in April
Higher than expected= 130k
Jobs growth =185k in March
Why this matters: Strong jobs data shows that elevated policy uncertainty and soft sentiment data is not yet reflected in hard data.
www.fxstreet.com/macroeconomi...
CPI inflation fell today. But it’s partly due to lower energy prices.
Going forward economists expect inflation to rise.
Bloomberg also asked me whether central banks should do nothing in the face of elevated forecast uncertainty!
No - they cannot do that.
Instead policymaking has to be forward looking, based on expectations of inflation and growth next year. They must take a view of those fundamental factors now.
There are implications for currencies if the Fed ends up cutting by less than the ECB this year (policy divergence).
Interest rate divergence can in theory only happen if
(a) it is match by further euro appreciation
(b) a change in the dollar/euro exchange rate.
For economists in thinking of UIP.
Powell is talking about this pull in opposite directions in a speech today.
www.barrons.com/livecoverage...
Fed, at some point, may be pulled in opposite directions of its dual mandate. With tariffs pushing on on core inflation. And tariff uncertainty pushing down on consumer consumption and business investment. This dilemma is unlikely to be felt for a while, as the labor market remains resilient.
We forecast <1% growth for the euro area this year. And inflation expected to come in below target end 2025. This allows the ECB to cut by 25bps tomorrow. Interest rates will be within our range of “neutral”.
Europe (without retaliation) will see a small impact on inflation but a bigger dent on growth.
Tariffs raise US inflation and are a headwind to growth.
Thanks to @bloomberg.com for having me on the show this morning to talk about tariffs, exchange rates and central banks.
🧵
Uk headline inflation falls to 2.6% in March.
2.8% in Feb.
pretty much as we had expected.
Core inflation
3.4% March 2025
3.5% February
CPI goods annual rate eased from 0.8% to 0.6%
CPI services annual rate slowed from 5.0% to 4.7%.
www.ons.gov.uk/economy/infl....
Annual growth in employees' average regular earnings excluding bonuses in Great Britain was 5.9% in December 2024 to February 2025, and annual growth in total earnings including bonuses was 5.6%.
www.ons.gov.uk/employmentan...
UK wage growth rose 5.9%!! Data released today.
The ONS said pay excluding bonuses rose 5.9% in the three months, up from 5.8% in the period through January. Private-sector wage growth, held at 5.9%.
That is high! But data measurement means we don’t know if this is driven by compositional changes.
Tariffs have surprised to the upside. We judge that negotiations will give rise to a small fall in the effective of tariff rate. Our new macros forecasts can be found here.
ifamagazine.com/vanguard-ami...
125% was yesterday
Today it’s 140%
www.telegraph.co.uk/business/202...
China places 84% tariffs on US goods.
US places a 145% on Chinese goods.
The trade war escalates.
In the middle of a US-China trade war.
Stocks recover today, but not fully!
The 90 day pause of liberation day tariffs (for all except China) provides relief to global stock.
But stocks are still below levels seen prior to Liberation day. Stocks dip down again as the China/US tariff got for that continues.
EU pauses the tariffs it had intended to place on the US in retaliation for the steel, aluminium and auto tariffs that were placed on the EU.
www.theguardian.com/world/2025/a...