In the City, the FTSE 100 index has made a quiet start to the morning, down 18 points or 0.3% at 6347 points.
Insurance group RSA is leading the risers, up 4%, after receiving a £7.2bn takeover offer from Canada’s Intact Financial and Denmark’s Tryg.
But generally, European markets are muted as the recent optimism about Covid-19 vaccine progress is tempered by anxiety over the looming winter.
Disappointing US retail sales figures yesterday (growth hit a six-month low) has also dampened the mood, leaving the Europe-wide Stoxx 600 flat this morning.
Richard Hunter, Head of Markets at interactive investor, explains:
“The initial vaccine euphoria is under pressure as Covid-19 cases continue to tick higher, highlighting the gulf between discovery and distribution.
With several US states implementing further restrictions and a further 70 000 hospitalisation cases, the impact on the economy remains in play.
Weak retail sales from the US also poured some cold water on sentiment, with the second wave having an impact on consumers’ propensity to spend. Continuation of any lockdowns in the festive season would also crimp citizens’ ability to travel, while the latest data has tended to suggest that a fiscal stimulus package is still required to energise a stuttering recovery.
Looking further ahead, Laith Khalaf, financial analyst at AJ Bell, predicts that inflation could pick up as companies try to recover their losses this year:
“The current lockdown may create some short-term volatility in the number, but the overall picture is one of low, gradually rising inflation. The economic damage of the pandemic means that many businesses won’t want to deter valuable customers by raising prices for some time to come.
“There is a legitimate question of whether all the fiscal and monetary stimulus thrown at the pandemic will create inflationary pressures further down the line. When confidence returns, we could see businesses looking to recoup losses by pushing through price rises. While the pandemic has cost some their livelihoods, we know that many people have actually seen a boost to their finances from enforced frugality, allowing them to afford price increases in future.
Inflation: What the economists say
Several economists are predicting that the current Covid-19 restrictions will drag inflation down again in the short term.
Here’s Suren Thiru, head of economics at the British Chambers of Commerce:
Debapratim De, senior economist at Deloitte, predicts that weak wage growth and rising unemployment will keep inflation subdued:
“October’s inflation figures have come in slightly above expectations. Yet they reflect a disinflationary environment, given the current backdrop of weak wage growth, rising unemployment and abundant spare capacity.
“Inflation is likely to remain subdued until the economy regains most of the lost activity due to the pandemic.”
Tom Stevenson, investment director for personal investing at Fidelity International, points out that a vaccine rollout should help the economy pick up:
“Inflation crept up to 0.7% in October on the back of slightly higher food. While prices are on an upwards path, rises are likely to be subdued for a while longer. Covid infections are still increasing, large swathes of the UK are under strict lockdown rules, restricting opportunities to spend, and unemployment is climbing. This is not a recipe for inflation reaching its 2% target any time soon.
“Further out, however, there is light at the end of the tunnel in the form of a potential vaccine. Re-opening the economy will rekindle animal spirits. The widely-discussed shift to negative interest rates looks less likely now and this is good news for investors. The Bank of England has increased its quantitative easing programme to encourage consumer spending and investment and it should now keep its powder dry.”
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Prices of second-hand cars also rose last month — a sign that people are trying to avoid using public transport due to the pandemic.
The ONS explains:
Prices for second-hand cars have risen by 1.4% between September and October 2020, compared with a 0.2% fall between the same two months a year ago.
This upward movement continues from last month, which is reported to be because of increased demand for used cars as people seek alternatives to public transport.
Inflation: the key charts
Despite rising to 0.7% last month, UK inflation is still some way below the 2% target:
While this chart shows how clothing and food had the biggest upward contribution to the cost of living last month:
Introduction: Clothes and food prices lift inflation
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Britain’s inflation rate has nudged higher, lifted by rising clothing prices, food, and second-hand cars.
Figures released by the Office for National Statistics this morning show that the Consumer Prices Index rose to 0.7% in October, up from 0.5% in September. That’s the highest in three months, after the CPI fell to just 0.2% in August.
Economists had expected a smaller rise, to 0.6%.
Here’s the details:
- Clothing prices overall rose by 2.8% between September and October 2020, compared with a smaller increase of 0.9% between the same two months a year ago.
- Food prices….rose by 0.1% between September and October 2020, compared with a fall of 0.6% between the same two months a year ago. The largest upward contributions came from vegetables (including potatoes and tubers), and fruit.
Most of the upward contribution to clothes prices came from women’s clothing, the ONS says, with further smaller upward contributions from men’s and children’s wear.
The ONS’s deputy national statistician Jonathan Athow explains:
“The rate of inflation increased slightly as clothing prices grew, returning to their normal seasonal pattern after the disruption this year.”
“The cost of food also nudged up, while second-hand cars and computer games also all saw price rises. These were partially offset by falls in the cost of energy and holidays.
Elsewhere, European stock markets are expected to be subdued as investors ponder rising Covid-19 case growth and tighter restrictions.
Overnight, coronavirus cases in Tokyo have hit a record of 493, and South Australia has announced a six-day lockdown.
Bitcoin, meanwhile, remains on a tear – hitting a new three-year high of $18,000 overnight which puts its record high in sight…
- 7am GMT: UK inflation report for October
- 10am GMT: eurozone inflation report for October
- 10.30am GMT: Bank of England chief economist Andy Haldane speaks at The CityUK’s National Conference 2020
- Noon GMT: US weekly mortgage approvals
- 1.30pm GMT: US housing starts and building permits for October
- 3.30pm GMT: EIA weekly US oil stocks
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