Has the UK successfully reined in its inflation rate?
HeadsUp: Economic Woes in Britain, but It's Not All Doom and Gloom
Say goodbye to 2024's festivities with a dose of pessimism, says Eshe Nelson in The New York Times. Consumers are feelin' gloomy due to dismal economic news. Rising inflation worries keep the Bank of England (BoE) from aiming for its 2% target until 2027, and folks are on edge. Here's the scoop:
The BoE took only a half-point cut in 2024, while US and European central bankers slashed rates by a full point. The UK gilts jiggled earlier this month, but calmed down post-December when annual inflation dipped to 2.5%. That brings 'em close to the long-term average, and sets up the BoE for another rate cut in February.
Brace yourself for a slow economy—it might mean multiple rate cuts ahead! Investors are cautious about banking on too many rate cuts, though, since markets were off guard last year, only getting two of the six cuts they had put their bets on. But with the government's national insurance hike and unemployment ticking up, wage pressures should start to ease, says Jacob Reynolds of Courtiers UK Equity Income. He predicts four rate cuts in 2025, dropping them to 3.75%.
Bank on these investments to shine if 2025 sees more rate cuts than expected, says Mark Preskett of Morningstar Investment Management:
- Housing-Related Stocks: Lower interest rates make mortgages more affordable, boosting real estate demand.
- Utilities: With lower debt costs, utilities profitability and cash flow increase.
- Small-Cap Stocks: Lower rates lower their financing costs, accelerating earnings growth, making them a good bet.
But over in the US, things are looking a bit trickier, with inflation on the rise after three straight months. US stocks turned bullish recently, thanks to signs that core inflation pressures are easing, according to Paul Kiernan in The Wall Street Journal. American inflation still lost ground since the June 2022 peak of 9%, but the descent has been "sluggish". US central bankers are still on the watch for Donald Trump's impact on inflation. Trump's plans include tariffs that could reduce goods supply and mass deportations that would cut labor supply, both of which could push prices up. Republican promises of tax cuts have the potential to kick off another demand surge. The Federal Reserve doesn't seem set on cutting rates anytime soon.
John Authers on Bloomberg agrees. US inflation is still "too high to encourage rate cuts". Worryingly, the University of Michigan consumer survey reports that US consumers expect inflation in five years to be 3.3%—the survey's highest level since 2008. High inflation expectations can create a self-fulfilling prophecy, potentially derailing the Trump 2.0 agenda before it even kicks off.
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Subscribers of our free newsletter can anticipate updates on personal finance, including potential changes in interest rates and their impacts on investments such as housing-related stocks, utilities, and small-cap stocks. Conversely, US investors might need to consider the potential impact of Trump's tariffs and labor policies on inflation, as the Federal Reserve remains cautious about any rate cuts due to high inflation expectations.
