Market snapshot: US policymakers under scrutiny as UK inflation jumps

After a bigger than expected rise in UK inflation, the Federal Reserve takes centre stage later, with investors on high alert for any changes in outlook.

The accompanying comments from the Federal Reserve's meeting later today will be closely scrutinised, with further evidence of a strengthening recovery and inflationary pressures guiding the next steps.

At some point, there will need to be a signal that the currently easy monetary conditions will be scaled back. The expectation is that the subject of tapering some of the relief has at least made its way to the table for discussion, if not immediate action.

This will follow on from the latest set of data, showing another spike in wholesale inflation and a drop in retail sales which was more than anticipated. The increasing success of the vaccination programme and therefore the mobility of the population is being reflected in a move towards spending on services and away from goods, as consumers look to spend in public rather than in private.

As investors hold their breath for the latest development, markets were slightly weaker but still comfortably ahead in the year to date, with the Dow Jones having risen by 12%, the S&P 500 13% and the Nasdaq 9.2%.

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The anticipation of strong recovering demand against restricted supply put a further fire under the oil price, which has now risen by 44% in the year to date. As economies in the US, Europe and Asia move back to growth, the rise is also underpinned in the meantime by falling supplies and output restraints which are seen as being likely to remain in place for the time being.

This factor contributed to UK inflation jumping higher to 2.1%, above the Bank of England’s target and also ahead of expectations of a rise to 1.8%. The Bank remains in agreement with the Fed that the rise is of a temporary nature, although the figure could get higher before receding. In the meantime, the stronger reading is unsurprising given the comparison with May 2020, when lockdown was in full force, as well as the strength of fuel prices.

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With the current restrictions being extended for several weeks, there has been some weakness in sterling as well as the sectors which are most likely to suffer further. However prudent the government’s decision proves to be, it nonetheless taps the brakes on what had been an accelerating UK economic recovery.

The slight drop in the pound has allowed the premier index to nudge higher and draw level with the more domestically focused FTSE 250. In the year to date, both the FTSE 100 and the 250 are ahead by 11%, with investors searching for the next positive catalyst as the uneven global recovery unfolds.