UK CPI inflation bubbles back up to double digits but better corporate news lifts Wall Street

  • Inflation still running hot with UK CPI numbers coming in at 10.1%
  • Tax cut bonfire and belt tightening should start to help cool the price spiral.
  • Pound dips below $1.13 as investors dial back on expectations of rate hikes.
  • Wholesale gas prices fall back which may also help calm inflationary pressures.
  • Black out worries remain but EU moves to cap spikes in volatility.
  • Netflix posts a rise in subscribers which is expected to add to the positive sentiment on Wall Street.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

‘’Despite attempts to turn down the heat, the cauldron of hot prices continues to bubble, spitting out yet more problems the UK government has to grapple with amid the ongoing political turmoil.

Scorching grocery prices are the big driver of the UK’s headline rate of inflation, which has jumped back into double digits, returning to July’s high. But with many consumers, households and businesses already feeling the burn of higher borrowing costs, a cold shock is set to be incoming. As they ramp down non-essential spending it is set to freeze off growth in the economy which should help bring down inflation as demand for goods and services lowers. With Trussenomics tax cuts reduced to a pile of dying embers, they no longer risk re-igniting the inflationary flames. This means that although the Bank of England is still expected to raise rates at the next meeting by 0.75%, investors are now banking on policymakers not going so hard and so fast with hikes, particularly next year. That’s partly why the pound dipped below $1.13 even though prices, on the face of it, still appear so hot to handle. 

Another cooling effect could sweep in eventually with European and UK wholesale energy prices easing off dramatically.  Since Friday TTF gas traded in the Netherlands’ virtual market has fallen back by 20%, while UK natural gas prices have eased off by 30%.  More clement weather and the replenishment of storage levels seem to have calmed worries about shortages, despite lack of supplies from Russia. Although prices are still around ten times higher than this time last year, the plunge from the summer’s eye-watering levels comes as a relief.

The drop in the cost on exchanges should eventually feed through into consumer prices in the months to come. However, it’s by no means clear if the trend will continue as prices have been hugely volatile and businesses right across Europe are still bracing for very tough months ahead, as they attempt to save energy but keep factories and plants running.

Worries about winter blackouts remain but France’s grid operator RDF has already offered reassurance to Britain that because of time differences and a different peak period due to industry use, it likely to be able to still push power to the UK during risky periods, even though it’s overall been a net importer of energy from Britain this year.  Hopes though for a stable supply are still being pinned on a milder winter.

The European Union is also planning to impose a volatility cap on gas prices, to reduce unsettling spikes in prices going forward, which should help companies with forward planning for energy budgets, but nevertheless getting used to an era of expensive energy will still be painful.

A robust set of numbers from Netflix serves as a reminder that if the product is appealing enough, customers will follow even during harder times. The surprise turnaround is set to help boost sentiment on Wall Street with futures trading higher, following yesterday’s gains boosted by other resilient corporate earnings from the likes of Goldman Sachs and Johnson and Johnson. A slew of hits has helped the streaming giant push up subscriber numbers, with customers rebooting accounts, or signing on the first time. With many consumers in key markets hunkering down for a tougher winter ahead, they are returning to pandemic habits of centering entertainment around the home. The introduction of a cheaper with ads alternative offering in early November may also help boost resilience as consumers look to trim budgets.  But still the competition remains tough out there for Netflix, with plenty of rivals jostling with their own hit show offerings.’’