US inflation points to rate rise, while UK prices stop falling - as it happened

Graeme Wearden (until 2.15) and Nick Fletcher

from on 2015-12-15 17:33 (#XQWB)

Britain's consumer prices index crept above zero last month to 0.1%, despite cheaper petrol and food

5.02pm GMT

After another Black Monday it was Turnaround Tuesday for European markets. With the oil price stabilising - Brent crude is now 1.4% better at $38.47 a barrel - and investors more or less inured to a US rate rise from the Federal Reserve on Wednesday, leading shares recovered some of their recent losses. The FTSE 100 finished higher for the first time in nine trading sessions, while other markets also moved ahead. The closing scores showed:

4.10pm GMT

Oil price volatility has seen crude record hefty falls and rises sometimes on the same day. But for once, it has remained mainly in positive territory with none of the violent swings of recent times, with Brent crude now up around 1% at $38.26.

And this (unusual) steadiness has helped support stock markets, with the Dow Jones Industrial Average up 183 points or 1% and the FTSE 100 2.4% better. Jasper Lawler, market analyst at CMC Markets, said:

Unlike on recent occasions, a reversal of the decline in oil prices has lasted through the afternoon and relieved some of the pressure on stock markets. The bounce had its beginnings on Monday when crude oil finished flat after having being down over 2% during the day and continued through Tuesday.

Monday's oil price rebound coincided with the Dow Jones Industrial Average narrowly avoiding a two-month low.

3.34pm GMT

But if the consensus now is that a US rate rise is inevitable on Wednesday, there are differing views about what happens after that. Some believe the underlying strength of the US economy may lead the Federal Reserve to a series of hikes. But a Wall Street Journal survey paints a different picture:

What goes up must come down? That's one worry as the Fed prepares to raise rates this week https://t.co/btYoyASnoe pic.twitter.com/B0qG9D2Uy0

3.29pm GMT

The expected rate by the US Federal Reserve on Wednesday is likely to have a negative effect on emerging markets, since they have benefitted from inflows of cash thrown off by central bank stimulus measures over the past years.

But the impact may not initially be that significant since the Fed move has been widely expected and emerging markets have already come off their highs. And in any case not all emerging markets are equal in this respect. That is the view of Sanjiv Shah, chief investment officer at Sun Global Investments, who said:

The Fed's rise in interest rates will be felt in the emerging market currencies to some extent, and they will be under some additional pressure as many have already been hit by the global commodity slump and general risk aversion to emerging market assets.

However, as the interest rate increase has been flagged for some time, much of its likely impact is already reflected in current prices and so it unlikely to be overly significant.

2.42pm GMT

US markets are continuing where they left off on Monday. In contrast to Europe, which showed major falls during the first trading session of the week, Wall Street ended a volatile day higher. And while European markets have now rebounded, the US is also soaring as investors come to terms with the widely expected interest rate rise from the Federal Reserve tomorrow.

Oil is again a dominant factor. After coming within a whisker of an 11 year low on Monday, Brent crude has recovered and is currently up 1.4% at $38.45 a barrel while WTI is up 0.5% at $36.8.

2.35pm GMT

Meanwhile the market is underestimating the pace of future US rate rises, according to Dr Harm Bandholz, chief US economist at UniCredit Research:

The Fed will raise rates tomorrow and signal a gradual rate hike path for the consecutive three years. Chair Yellen has highlighted in her recent speech that the FOMC "will carefully monitor actual progress toward our inflation goal as we make decisions over time on the appropriate path for the federal funds rate."

As we think that the underlying strength of the domestic economy will continue to allow inflation rates to grind higher, we reiterate our view that financial markets underestimate the pace of hikes.

2.23pm GMT

And another analyst agrees that a US rate rise is now likely on Wednesday in the wake of the inflation figures. Rob Carnell at ING Bank says:

The last possible piece of data that could have undermined expectations for a 25 basis point rate hike at the Dec 16 FOMC meeting, has if anything, reinforced the need for a small increase in rates.

November CPI was flat on the month - but that was still sufficient, given helpful base effects, to push the annual inflation rate from 0.2% year on year to 0.5% year on year. Much more of this seems likely in coming months, even with oil's recent price weakness. So as we move through January and into February, we look for headline inflation to rapidly begin to converge on core inflation, now up to 2.0% year on year (up from 1.9% in October).

2.11pm GMT

Ipek Ozkardeskaya of London Capital Group says today's US inflation report will satisfy the hawks at the US Federal Reserve to vote for an interest rate rise tomorrow night.

She explains:

The US inflation figures matched the market expectations in November. The headline inflation remained flat, while once the impact of food and energy prices discounted, the prices inflated 0.2% on month.

Given the cheaper energy and oil prices, the Fed may have some additional difficulty to lift the consumer prices to their 2% target soon enough, nevertheless the price in services appear to counterweight the deflation in the energy and commodity complex.

#US inflation reassured #Fed hawks #SPX #Dow opening calls https://t.co/eXNnYInIR6

2.07pm GMT

A handy visual of how the inflation rate has picked up:

Last inflation report before Fed points to rate hike. Headline CPI gains from 0.2% to +0.5%, Core CPI +2% from +1.9% pic.twitter.com/y0SiPoeJ9Z

2.03pm GMT

The main message from today's US inflation report is that pricing pressures are building (if you ignore cheaper oil and food).

This chart, from Johnny Bo Jakobsen of Nordea Markets, shows how all the measures of core inflation are picking up, with core inflation in the services industry hitting a seven-year high:

Today's CPI report showed more signs that domestic inflation pressures continue to mount, despite the stronger US dollar and lower oil prices. As the impact of the stronger dollar and the slump in energy prices begins to wane next year, inflation will climb even higher.

We stick to the view that rising inflation pressures will imply that the pace of Fed tightening during 2016 will be faster than is currently priced in by markets.

1.39pm GMT

It appears that the US inflation report paves the way to a Fed rate hike tomorrow night:

CPI in line with expectations...services pressures continue to dominate.

Next month, core #CPI will go to 2.1% or 2.2% y/y, simply because we drop off last December's +0.06% aberration.

2-year yields tick up a bit after that CPI report. Lack of weakness removes some fears that Fed's making a mistake.

Lift off ... we have lift off ....

1.32pm GMT

Here we go....

Inflation across the US economy has risen, giving the Federal Reserve another green light to hike interest rates tomorrow.

Core CPI accelerates to 2.0% YOY as expected.

1.25pm GMT

Although the eurozone crisis has dropped out of the headlines, it isn't over.

And in Greece today, thousands of nurses took to the streets to protest against cuts envisaged in the country's latest package of internationally mandated reforms. That package will be voted on tonight

"It's totally unethical that this decision was taken without any prior discussion literally overnight. It is almost as if we are being punished because departmental heads in other areas of the public sector, have received a a50 pay increase as part of the reform. To think that this is a left-wing government that has done this is even more absurd."

"Hospitals are in a tragic state " cuts are such that on the night shift there is only one nurse per 70 patients. At least with other governments you knew what to expect. This government does things overnight. You never know what tomorrow will bring."

"With disbelief we have been told the cut was a typing mistake but frankly we don't believe it. We will fight until it is officially withdrawn."

1.15pm GMT

Reaction to this morning's UK inflation report is still coming in.

Martin Beck, senior economic advisor to the EY ITEM Club, reckons that price rises will remain weak in 2016:

"November's figures are likely to mark the beginning of the long road back towards the 2% target, with the base effects associated with last year's collapse in the oil prices now having started to kick-in. We still expect inflation to remain below 1% until well into 2016, requiring the Governor to write a further series of open letters of explanation to the Chancellor."

1.04pm GMT

One down, one to go.

With UK inflation out of the way (coverage starts here), investors are now looking to America.

12.38pm GMT

Shares in London have pushed higher following the news that Britain escaped negative inflation last month.

The FTSE 100 blue-chip index jumped by 102 point, or 1.75%, to 5977 points. That's a hefty jump, clawing back all of yesterday's selloff.

12.16pm GMT

Page 21 of today's inflation report contains a detailed breakdown of the Consumer Prices Index, showing how prices of key items rose (or fell) in the last year.

Here's a flavour:

11.48am GMT

Here's our news story on this morning's inflation figures, by Heather Stewart:

UK inflation nudged back above zero last month for the first time since July, with prices rising by 0.1%.

Plunging global commodity prices have meant that inflation has been unusually weak in historic terms through much of 2015, and despite November's 0.1% increase, the consumer prices index (CPI) shows that the price level across the economy stood barely higher than at the end of last year.

Related: UK inflation moves above zero

11.39am GMT

With inflation so low, UK workers are currently enjoying real wage increases of around 2.5% to 3%.

That's bringing some relief after the long cost-of-living squeeze after the financial crisis began.

Employees may begin to demand higher wage increases in cash terms once prices begin to go up and they feel the pinch on their disposable incomes. When this occurs, employers and staff will be under even more pressure to raise productivity to pay for sustainable wage rises.

The thinktank considers the impact of five different scenarios for productivity and prices on median hourly wage growth in 2016. On its best case, faster-than-expected productivity growth of 2% and prolonged low inflation that rises to just 1% by the end of the year could result in the fastest real wage growth for more than a decade at around 3%.

But if productivity growth holds at 1.3% and inflation grows more quickly than forecast to hit the Bank's target of 2% by the end of the year, the pace of real wage growth could drop to 0.9%. That would leave workers waiting even longer to return to the kind of pay rises they enjoyed before the downturn.

11.29am GMT

Andy Scott, economist at money transfer company HiFX, is also in the growing band of experts who believe UK interest rates will remain at record lows for many months, thanks to weak inflation.

"We seem to be experiencing the effects of a slowdown in a number of producing countries, especially China, that are forcing prices lower.

We expect this situation to continue into next year and for the Bank of England to therefore maintain rates where they are until the back end of next year, possibly into 2017 depending on whether OPEC decide to intervene to lift oil prices.

11.18am GMT

Low inflation and cheap oil is a double-dose of pre-Christmas cheer for consumers, says Chris Williamson, of financial data provider Markit:

"This is clearly good news for consumers in two respects: low prices boost spending power and the dovish outlook for inflation takes pressure off the Bank of England from hiking interest rates any time soon."

11.17am GMT

Cheaper oil prices may push the UK back into negative inflation soon. But rather than fuelling panic about deflation, it would be positive for the economy overall.

Kallum Pickering of Berenberg Bank explains:

This is not a serious risk to the economy. As a net importer of oil the UK benefits when prices fall. Especially when some of these cost savings are passed onto households.

10.50am GMT

The cost of a house in Britain continues to surge much faster than the headline inflation rate.

It's a fresh blow to those trying to get on the housing ladder, and one expert says the chancellor is partly to blame.

'These figures reinforce the findings of other recent surveys, demonstrating that the housing market is heading towards a boom and bust that the government is partly responsible for but said it wanted to avoid.

'The boom is being engineered because investors and second homeowners are rushing to buy before April and avoid higher stamp duty. Afterwards, we will see a much quieter market, with rising rents and affordability becoming more stretched as lending criteria tightens and interest rates potentially rise.'

10.38am GMT

This chart shows how the record-breaking monthly drop in clothing prices in November had the biggest impact on inflation last month.

10.21am GMT

Our video team have pulled together a handy explanation of what inflation is, how it's calculated, and why it can be a problem....

10.18am GMT

Today's inflation report doesn't capture the latest plunge in the oil price (which came close to its 2008 lows yesterday).

"The value of a barrel of Brent crude has now tumbled below $40 (26.39), which is the lowest it has been since the financial crisis. Motorists have already seen the savings from lower wholesale petrol prices being passed on at the pumps. Britain's largest supermarkets have cut their petrol prices to less than a 1, the first time they have gone below this "magic" threshold for six years, in the hope that this can lure in customers during this crucial festive period. The pressure is now on the non-supermarket forecourts to follow suit.

"This oil price drop should eventually filter through into savings on utilities bills, which will be particularly welcome as we enter into the coldest months of the year.

10.03am GMT

Maike Currie, associate investment director at Fidelity International, reckons Britain's inflation rate will turn negative again soon:

"Today's move into positive territory is likely to be short-lived with the massive fall in oil prices and the supermarket discount wars likely to keep a lid on UK inflation as we head into 2016. I expect UK CPI to continue see-sawing around the zero-mark for the near future.

"Deflation is a double-edged sword which can have wreak economic havoc but can also kick start regenerative economic forces. The positive side effects of deflation as manifested in fuel in food prices is that it provides a boost to real incomes. In both the US and UK, falling prices coupled with a strengthening labour market, resulting in job and wage growth, raises real incomes.

9.58am GMT

UK consumers enjoyed a record-breaking fall in clothing sales last month.

Today's report shows that prices fell by 0.1% between October and November -- the first monthly fall of this type since records began in 1996. It follows the largest September to October price increase on record.

....price movements for a broad range of outerwear (particularly women's trousers) with more products on sale this November than a year ago.

9.45am GMT

The inflation report is packed with nuggets, explaining why the cost of living turned positive last month.

Transport has less of a drag on inflation, because it's now more than a year since petrol prices began to fall sharply (so this effect starts to 'drop out' of the inflation report).

9.44am GMT

The broad picture is that Britain's inflation rate has been bobbing around zero this year:

UK annual inflation positive for the first time in 4 months. Hasn't been higher than 0.1% since January pic.twitter.com/ctY6u1yq4c

9.35am GMT

First positive inflation data in UK since July...but at +0.1%, still WAY off 2% target

9.34am GMT

9.32am GMT

Breaking: The UK has broken out from negative inflation, just!

Prices rose by 0.1% annually in November, according to the latest data from the Office for National Statistics.

9.23am GMT

With typical prescience, rating agency Moody's has slashed its forecast for oil prices next year and predicted a 'prolonged period of oversupply'.

"It will take time for these large global inventories to unwind, and combined with the possibility of new supply coming online from Iran, we expect oil prices to remain lower for a longer period than previously anticipated."

9.06am GMT

Conner Campbell of SpreadEx says traders are hoping that the oil market won't dominate the agenda again today:

After a jittery, commodity-driven plunge on Monday, one that left the FTSE at 3 year lows, the markets will be hoping Tuesday's busy day of data can distract investors from any further twists in the price-upsetting oil saga.

8.54am GMT

Australian traders would be forgiven for reaching for a few cold beers tonight, after seeing stocks hit their lowest level since the middle of 2013.

From Melbourne, my colleague Martin Farrer explains:

The Australian share market has slipped to its lowest level for more than two years after the benchmark ASX/S&P 200 index suffered its sixth successive day of losses.

After a volatile day's trading on Tuesday, the index closed down 0.39%, or 19 points, at 4,909.6 points, its lowest point since July 2013.

8.41am GMT

A healthy rally is underway across Europe this morning, despite the prospect of a historic US interest rate hike tomorrow evening.

The main indices are all in the green, up by around 1.5%, with traders holding their nerve as they await the conclusions of the Fed's two-day meeting which begins in a few hours.

The overriding feel I am getting is that traders want to buy risks assets again, but they are too concerned about being long in a market where traders genuinely inherit a belief of a policy mistake from the Federal Reserve.

8.21am GMT

Shares are rallying in London at the start of trading, as investors regain their nerve after yesterday's wobble.

The FTSE 100 index of major blue-chip companies has bounced by 1.3%, recovering more than half of yesterday's losses and reversing a long slump. Other European markets are also rallying....

The positive opening comes thanks to a positive US close as a depressed oil price regained some composure from seven year lows courtesy of a weaker US dollar.

It follows a weak Asian session with investors on edge as the Fed begins the two-day FOMC meeting that could culminate in the first US rate hike in nigh on a decade with repercussions from emerging markets to high yield debt.

8.02am GMT

We have new evidence that Volkswagen's sales have been dented by the emission scandal.

7.49am GMT

Britain's brief flirtation with falling consumer prices could end today, when November's inflation report is published at 9.30am.

Inflation was minus 0.1% in October and September, but has probably turned positive again now.

The rate has been pulled down sharply by a combination of tumbling global commodity prices, from oil to food, and the effects of a strong pound, which makes imports cheaper.

But economists say that inflation probably returned to positive territory last month, mainly thanks to so-called base effects - falls in petrol and alcohol prices were smaller this November than a year earlier.

7.35am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial market, the eurozone and business.

America's top central bankers will gather in Washington, DC, today to start what could be a historic two-day policy meeting. Markets currently reckon there's a 76% chance that the Federal Reserve will take the plunge and hike borrowing costs from the current record low on Wednesday, for the first time in nearly a decade.

Barring a massive shock, it's highly likely the Fed will raise rates 25bp this week. With scant exception, it is universally broadcasted and already widely priced in. Therefore, investors will be focused on the Fed's forecasts, notes and tone.

Given the deflationary impact of asset prices adjusting to the US hiking cycle; USD strengthening, oil / commodities falling and general weakness in global demand and data on uncertainty, we anticipate a dovish, gradual steepening strategy will be communicated.

European #stocks to rebound this morning according to #futures. +1.3% after 5 days of losses pic.twitter.com/UDoDT5eDz1

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