It was billed as the most closely-watched interest rate decision in years. In the end the outcome was very familiar – the Fed took a ‘let’s wait and see’ approach and rates were held where they have been since December 2008. Of rising concern amongst policy-makers is China’s slowdown, and the uncertain impact it has on the US economy.
Hold. When the fog clears it's important to remember that the Fed has two jobs. First, to ensure price stability, for which inflation of 2% on its preferred measure is the target. Second, maximum employment. Remember, too, that it takes anything from 12 to 24 months for monetary policy changes to have their effect. Inflation is zero, with even core inflation below target and no signs of surging prices. The job market is in decent shape but the Fed reckons unemployment can fall further without causing much inflation. With mounting concerns about China and elsewhere, it's no surprise rates were unchanged.
Neither clear nor present. It would have taken an especially eagle-eyed Fed hawk to detect much inflationary pressure in the US. Consumer prices fell in August and were up only 0.2%y/y. A 23% drop in gasoline prices explains the lion’s share of this weakness. But even excluding that and often-volatile food prices, core inflation was just 1.8%, the rate around which it has hovered for three years. With no imminent inflationary threat, it’s no surprise the Fed left rates on hold.
Eating and driving. US retail sales were 2.2% higher in August than a year earlier. That’s hardly a consumer boom but the moving parts tell an interesting tale. A lower oil price meant gasoline sales were down 18%y/y. That lower oil price put money back in consumers’ pockets and Americans used it to eat out and buy cars. Sales at restaurants and pubs were up 8%, while auto sales rose 6%. Spare a thought for Main Street department stores where sales were down 2% while online sales surged by 7%.
Pedestrian. Not even the mighty US is immune to forces from beyond its shores. Industrial production was down 0.4%m/m in August and up only 0.9%y/y. One reason was the continued fall in oil production as the prolonged period of price weakness bites harder on shale producers and their suppliers. Another was the combined effects of a strong dollar – it’s up nearly 15%y/y – and weaker demand in export market. Whatever the reasons, it was hardly a runaway performance by the makers.
Going nowhere. Inflation is similarly low in the UK. August saw 0%y/y inflation for the fourth time in eight months. The highest reading all year has been 0.3%y/y. What's dragging it down? Falling prices of food, transport and clothing. And while inflation in services (which accounts for over 70% of the economy) is running at a healthy 2.3%y/y, this is still low by historical standards. There’s little inflationary pressure for the Bank of England to be worried about.
Hat-trick of good news. The UK economy added more than 40k jobs in the three months to July compared to the previous three months, but that was just keeping pace with the increase in the 'economically active' population so the unemployment rate was unchanged at a healthy 5.5%. And there was more evidence that workers are getting a bit more productive – hours worked are down while economic output is up - meaning output per worker is rising. Meanwhile wages grew 2.9%y/y in the three months to July. With inflation so low real wage growth is at its healthiest for eight years.
Still healthy. Retail sales volume growth slowed a little in August, rising by 3.7%y/y. But the slowdown is nothing to worry about. 3.7% is a pace well above even pre-crisis norms. In part, it is being boosted by heavy discounting in shops, but that’s down to lower fuel and food prices. Just like the US, consumers in the UK are seeing a bit of their cash-flow freed up for other things, including more internet shopping. Online clothing, footwear and household good sales rose by over 12%yy in August.
Punchy. UK house prices rose by 5.2%y/y in August, bringing the average price of a house outside of London to £242k. The East of England saw the fastest rate of growth at 8.9%y/y. Average prices in the capital increased to an eye-watering £525k. That's almost 20 times the average post-tax income of a UK household. UK house prices may be running away from average incomes, but they are also running at double the rise in average rents. Small wonder then that the Financial Policy Committee is keeping an eagle eye on the UK's buy-to-let market.
Disclaimer: This material is published by The Royal Bank of Scotland plc (“LONDON:RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited.
Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice.