Week in the markets: is inflation back on track?

There’s no doubt about the main area of focus this week. After a long wait, hopes are rising that we’ll finally get some good news on inflation here in the UK.  

Inflation watch

With inflation announcements on both sides of the Atlantic this week, it looks likely that the UK will soon be less of an outlier. Prices are still rising more quickly here than in the US, but the gap is starting to narrow. 

The good news for Prime Minister Rishi Sunak, who placed lower inflation at the centre of his ‘five priorities’ a year ago, is that this week could see him achieve his goal of halving the inflation rate from the 10.7% it stood at when he made the pledge at the end of 2022. 

The forecast is for the consumer price index to have risen by less than 5% in the past 12 months. That’s still above the Bank of England’s 2% target but it looks a lot healthier than the recent peak rate of 11.1%. 

The key driver will be lower wholesale gas prices which are starting to feed through into more affordable household energy prices. 

Over in the US, inflation is also expected to be lower this month. Just 3.3%, down from 3.7% a month ago. And that should provide cover for the Federal Reserve to hold interest rates in their current range between 5.25% and 5.5%. In due course the Fed can then start to reduce the cost of borrowing, perhaps as soon as the middle of next year. 

Autumn statement

The fall in inflation is part of a generally improving economic picture here in the UK, with the government enjoying a slightly better fiscal position on the back of higher tax receipts, as frozen allowances drag more people into higher tax bands. 

That opens up the possibility of some pre-election tax giveaways when the Chancellor sets out his Autumn Statement next week. He has warned that there is little scope for these, but the pressure is on from backbenchers who are looking nervously at opinion polls that forecast a change of government when Britain goes to the polls next spring or autumn. 

Key measures to look out for include: changes to the UK’s most-hated tax, on inheritance; tweaks to our complicated ISA savings regime; and maybe some help for homebuyers, hit by the recent surge in mortgage rates. 

Earnings season

Meanwhile, the most important driver of share prices - company earnings - is looking in good shape as the third quarter results season draws to a close. With around 450 of the US’s top 500 companies having now reported, earnings growth is gravitating towards 4%. That makes next year’s double digit profit growth forecast, and the same again in 2025, look plausible. 

Improving earnings is key to the recent rally in share prices after the 10% correction between July and October. For the market to pick up steam again, investors need to be reassured that the Federal Reserve has navigated a soft landing for the economy, and the favourable backdrop for profits that implies.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Please be aware that past performance is not a reliable guide indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.