US inflation falls to a two-year low, increasing pressure on Bailey to lower prices

Last month, US inflation dropped to its lowest level for more than two-years. This increased pressure on Andrew Bailey in order to stop price increases from becoming a permanent part of the British economy.

The consumer prices in the US increased by 3pc from June to June. This is down from the peak of 9pc that was reached a year earlier and also below the forecast of 3.1pc.

Economists say the fall in US prices shows that the Federal Reserve has succeeded in its fight to reign in costs. This gives hope that the Bank of England will be able replicate this effort.

The dollar’s decline following the release of the inflation figures prompted a surge in sterling above $1.30. This is the highest level for the pound since April 2022. The FTSE 100 had its best day in November of last year with a 1.83pc rise to 7,416.

UK borrowing costs have also fallen, with yields on gilts of two years falling by nearly 0.2 percentage points in a single day.

Martin Beck, Chief Economic Advisor of the EY Item Club said: “It’s a sign that inflation isn’t structurally baked into the system – it could come down. It is coming down rapidly in the US and some European countries. This gives some hope that the UK could follow suit as we are not so different from those economies.

The pound has increased, which will reduce import costs.

The economists said that the US inflation rate may be harder to maintain if oil prices fall more than expected. Core inflation slowed down from 5.9pc last month to 4.8pc, which is less than headline inflation. Erik Norland, Senior Economist at CME Group stated that this implied that over four-fifths of the decrease in headline inflation was due to falling oil prices.

The announcement came after Mr Bailey, Bank of England Governor, stated that higher interest rates would not cause a financial emergency as Britain’s banks are strong enough and capable of absorbing the shock.

The Bank of England is expected to increase its base rate from 6.5pc to 6.25pc. This is a decrease in comparison to the previous expectations of 6.5pc.

Since the Bank of England started increasing the benchmark rate in December 2021, interest rates have increased from 0.1pc up to 5pc. When the Bank’s Monetary Policy Committee meets next month, it is expected that rates will be raised to 5.5pc.

The Bank of England stress tests examine the books of lenders to determine how well they would fare in a hypothetical economic collapse.

The war game examined whether the lenders could survive a recession worse than 2008, which included a 30pc decline in house prices, 5pc in GDP, and 17pc in inflation.

The testing revealed that NatWest, Barclays and Standard Chartered would be resilient in the face of a “severe scenario”.

The lender said that they had sufficient cash reserves to help struggling borrowers.

The Bank stated: “The UK Banking System has the capability to support households, businesses and even financial institutions through a period with higher interest rates. Even if economic conditions and financial conditions are substantially worse than anticipated.”

It warned, however, that the abrupt transition to higher rates of interest and increased market volatility would cause new strain on the financial system.

Mortgage payments will increase dramatically, and this will have the biggest impact on homeowners. Rates that are higher increase the likelihood of default by borrowers, causing lenders to suffer losses.

The Bank also warned that a new market crisis could occur, similar to the chaos caused by the mini-Budget in 2011.

In its semi-annual Financial Stability Report, it said: “There are still vulnerabilities in market-based financing that could become more evident as interest rates increase.” For example, rapid changes of interest rates can cause liquidity issues for non-banks as we saw in 2022 when the impact of a sudden shock in the liability driven investment (LDI sector) led to further market disorder in UK government bond markets.” Episodes like these can drive up the cost to borrow.”

Mr Bailey insisted that high street banks pass interest rate increases on to savers. He added that the economic headwinds caused by higher borrowing costs did not pose a threat to the stability of the financial system, as they had during the financial crises.

He said: “It is important to have a competitive banking system that encourages banks and savings rates to compete.”