Stock Take

Has the US Federal Reserve finally got the upper hand in its fight against inflation?

Data released on Wednesday provided hope that the succession of interest rate rises may at last have punctured soaring prices. Consumer price inflation rose 3% in the year to June, down from 4% in May. It’s the smallest annual increase in more than two years.

US markets cheered the news, with the main stock indices hitting 15-month highs, boosted significantly by shares of big tech-related companies, which tend to be sensitive to higher interest rates. The US stock gains also pushed up the global MSCI World Index, which is now around 14% higher for the year. The FTSE 100 registered its best weekly performance in more than three months on hopes of the Fed’s rate hikes ending.

The positive data on inflation came after the previous week’s news of slowing jobs growth, suggesting the Fed’s aggressive rate rises were beginning to cool the economy. But unemployment is still close to a multi-decade low, and wages are still growing well above the level consistent with the Fed’s inflation target.

Core inflation, which strips out volatile food and energy prices, is proving more resilient and remains a concern. Core CPI fell more modestly, from 5.3% to 4.8%, and remains well above the Fed’s 2% target.

Keith Wade, Chief Economist at Schroders, believes the central bank will press ahead with its well-signalled rate rise later this month. “The labour market is cooling but is still tight enough to accommodate strong wage growth. Such second round effects have the potential to perpetuate inflation by raising labour costs across the economy, which the Fed will be keen to avoid.”

The relatively rapid progress the US has made in curbing price increases stands in sharp contrast to other advanced economies such as the UK, where inflation remains at 8.7%. Danny Blanchflower, a former member of the Bank of England’s rate-setting committee, suggested the US economy was nimbler than the UK.

“There’s been a COVID shock for everyone and there’s been a war shock for everybody. The question is what distinguishes the UK from everywhere else and I would say the answer is Brexit, which has made it more difficult for firms to do things like switch supply chains to lower cost alternatives.”

The UK economy’s struggle was underlined by news that it shrank by 0.1% in May, partly due to the extra bank holiday for the coronation. This followed growth of 0.2% in April and suggests that UK GDP is on track to rise by around 0.1% in the second quarter.

In a speech at Mansion House earlier in the week, BoE governor Andrew Bailey reinforced its commitment to “see the job through” on inflation but stressed that “both price and wage increases at current rates are not consistent with the inflation target”.

Right on cue, official figures showed that UK wages rose at a record annual pace, growing by 7.3% in the March to May period and fuelling fears that inflation will stay higher for longer. But there were signs of a slowdown in the labour market. The unemployment rate rose unexpectedly to 4% from 3.8% in the three months to April, while job vacancies continued to fall.

The yield on two-year gilts fell sharply on the news, suggesting investors were dialling back their bets on how much higher the Bank would go with its run of rate hikes. The BoE has made 13 back-to-back interest rate increases since December 2021, with its next announcement due on 3 August.

Ahead of this week’s meeting of G20 finance leaders in India, the International Monetary Fund gave its assessment of the state of the global economy. Confirming that first quarter growth slightly outpaced its April forecasts, the IMF stuck with its global GDP growth forecast of 2.8% – down from 3.4% in 2022. It noted weakness in manufacturing across G20 economies, but that demand for services remained strong, meaning that “Services inflation – which is now the major driver of core inflation – is expected to take longer to decline”.

Wealth Check

As an independent business owner, your purchasing power with your suppliers may be more modest than that of their other customers – particularly if those suppliers are large and powerful corporations.

But there are still techniques for negotiating more favourable terms – even with a company that has the upper hand.

Your ability to negotiate with larger suppliers depends on several factors, such as your business model, specialism, customers, and sector. You need to examine each one, looking for any small areas of leverage.

Start by defining what makes you successful – for example, why your customers love you. Those niches or selling points may also make you valuable to some suppliers. For example, if your brand is strongly associated with environmental protection, they may want to work with you as it builds their sustainability credentials. Or you may have specific scientific or technological expertise that could help them.

Every supplier will have flexible and inflexible variables, so probe for softer areas. “You may think your suppliers don’t want to negotiate, but the more you talk to them and understand their needs, the more that might change,” says Andy Benson, Business Growth Advisor at Elephants Child. “Even if they have a reputation for dominating their distributors, try talking to them first. If you can help them grow a certain market or increase margin, you never know.”

Some suppliers might negotiate prices; others never will. But they might give you better terms in other areas, which could be more important, depending on your business model and financial situation. For example, an extension of credit or payment terms will ease cash flow; if you’re cash-strapped, that may be much more valuable than a small discount.

Alternatively, you may be able to arrange exclusive products or bundled offerings with higher margins and up-selling opportunities. For example, gaming consoles are often low-margin products. But offering add-ons and bundled propositions to keen, loyal gamers could align your branding and increase margin significantly for you and the suppliers.

In The Picture

Despite the macroeconomic challenges faced over the past year, defaults among US and European companies in the high-yield space remain relatively low.

Source: ICE BofA Global Research. Data as of May 31 2023

The Last Word

“Act now or face the full force of the law.”

The Department for Energy Security tells fuel retailers to begin voluntarily sharing live prices, or else be legally forced to do so.

Schroders is a fund manager for St. James’s Place

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