Recent inflation waves have stirred demonstrations in London. There was a protest on June 18 against the rising cost of living, with protesters demanding that the government take more action to address the problem. As the prices of necessities such as energy and food rise, the year-on-year increase in the UK's consumer price index in April reached a new record-high last seen nearly 40 years ago. Countries facing the pain of high inflation include the United States, Canada, Japan, and South Korea, among others. Today we will take a look at the inflation situation in various countries.
The United Kingdom (UK)
Inflation in the UK is a severe problem, after rising sharply to 9% in April, mainly due to a sharp increase in the UK energy price ceiling. Electricity and gas prices have climbed sharply and continue to rise. The Bank of England expects the energy price cap to be raised in October. As a result, by the fourth quarter, the UK's average CPI might cross the 10% mark.
Faced with soaring inflation, the Bank of England has raised interest rates five consecutive times. However, the rate hikes are still relatively prudent, as the bank raised interest rates by 25 basis points as scheduled on June 16, raising its base lending rate to 1.25%. Recessionary economic data has constrained the Bank of England's moves to curb inflation. A sharp rate hike could exacerbate the British economy's downward trend.
So this has created a situation where inflation is already severe, but the markets expect interest rates to rise by a small margin, limiting the pound's upside. On the other hand, the actual performance of the British economy continues to be sluggish. Investors' concerns about the outlook for the UK economy exceeded their expectations of aggressive interest rate hikes, weakening the pound soon after the latest hike. The future direction of the pound will be mainly determined by the direction of economic data, especially the initial UK June PMI, which will be released this week. If the financial data remains unsatisfactory, it will continue to hurt the pound’s trend.
The United States of America (USA)
The US consumer price index (CPI) rose 8.6% year-on-year in May, beating market expectations. The US CPI has been above 7% for six consecutive months. To the market's surprise, the CPI did not peak as expected but continues to climb, which has triggered a plunge in the US stock market. Seeing the onslaught of inflation, the Fed announced its most significant rate hike in nearly 30 years this month when it raised its benchmark rate by 75 basis points to the 1.50%-1.75% range.
Due to the significance of recent interest rate hikes, Fed Chairman Jerome Powell told the market that it is uncommon to raise interest rates by 75 basis points. This move created downward pressure on the US dollar’s recent trends. This week the market will be paying attention to Powell's two consecutive days of testimony before the Senate on the Fed's semi-annual monetary policy report. His attitude and stance on the Fed's next policy move may attract a new flow of funds to the US dollar if his stance is considered hawkish.
Overall, the main driver of inflation is high energy prices. The market does not expect US inflation to fall below 8% until October. Therefore, the Fed could continue raising interest rates, which has raised speculation amongst some investors about the US dollar's future trends.
Another area of focus this week is Canada's May CPI data, which will be released today. With inflation at 6.8 per cent in April, a nearly 30-year high. The market expects the Bank of Canada to raise interest rates by 0.75 percentage points at its July 13 meeting. This would be in line with the Fed's rate hike this month and on track to be the biggest rate hike in 24 years.
In the short term, the Canadian dollar is expected to rally as the market looks forward to the Bank of Canada's next aggressive rate hike. The USDCAD is expected to test the May high of 1.3077. Canada is a major producer of commodities, including oil. The continued rise in commodity prices will benefit Canada's economic growth to some extent, partially offsetting the impact of interest rate hikes. On the other hand, due to concerns about the economic downturn and forecasts that the Fed could slow down the pace of interest rate hikes weighing on the US dollar, the Canadian dollar could strengthen in future.
Japan & South Korea
After seven years, Japan's CPI climbed to 2.5% in April, breaking the central bank's inflation target of 2% for the first time. Although inflation has risen, the Bank of Japan has resisted the idea of rate hikes and insists on its ultra-low interest rate stance, weakening the yen's trend. As Japan continued its quantitative easing policy, the yen depreciated to a 20-year low against the US dollar, and its future direction remains uncertain. The market is waiting for a change in policy by the Bank of Japan. The yen trend may be even less optimistic if the current approach is aligned with economic growth.
South Korea's supply of energy and industrial materials relies on imports. The long-term depreciation of the Korean won has increased the cost of imported goods. Interest rate hikes in other countries too have exacerbated inflation levels. Speculation of interest rates being raised by 50 basis points next month appear to be quite likely amid hopes that a rate hike will help the won recover.