Tighter Inflation Figures and Further Interest Rate Cuts: A Pivotal Week for Financial Markets

This week promises significant importance for financial markets and all those whose lives are influenced by financial decisions. On Monday, the United Kingdom's memorable exit from the European Exchange Rate Mechanism on September 16, 1992 – "Black Wednesday" – will be commemorated once again. At that time, the country plunged into a brief phase of economic turbulence and disillusionment, leading to a remarkable economic recovery. Although the Conservative Party never fully overcame the loss of reputation, the British economy experienced stable and balanced growth phases. The Labour Party eventually took the helm in 1997 under Tony Blair and benefited from a flourishing economy until the global financial crisis of 2007-09. This week is marked by significant data releases and political announcements, with particular attention on the balance between inflation and economic activity. So far, the United Kingdom has performed remarkably well; inflation dropped to 2.2% and the gross domestic product grew steadily, at least until the stagnation in June and July – a prime example of "spotless disinflation." The upcoming inflation figures on Wednesday are expected to remain close to the 2.2% mark, slightly above the target value of 2%. Inflation is expected to decrease slightly next month, but in October, an increase in the Ofgem price cap by 10% could raise the inflation rate to about 2.4%. In the medium term, inflation could rise again as favorable comparative figures from the previous year disappear. The deeper inflation figures, particularly the core rate, are crucial. This week, core inflation could rise to about 3.6% and even climb to nearly 4% over the winter. This carries risks for wage negotiations; significant wage increases in the public sector could trigger similar demands in the private sector. The adjustments to the minimum wage and National Living Wage in April could also increase pressure on wages and thus price inflation. Nonetheless, the Bank of England's Monetary Policy Committee (MPC) is expected to lower interest rates by 0.25% on Thursday, possibly inspired by a similar decision by the US Federal Reserve the previous day. This follows the recent interest rate cut by the European Central Bank and certainly prompts a discussion about further interest rate movements. Interestingly, this depends on economic conditions that are not identical everywhere. In the US, the labor market shows weaknesses, and there is even speculation about an impending recession. China's economy is also struggling with weak demand, and in Europe, signs of economic stagnation are increasing. Should the UK economy significantly weaken as well, it would reduce inflationary pressure and favor further rate cuts. However, such a weakening has its downsides, burdening the labor market and public finances. On Friday, the latest snapshot of government debt will be presented, providing essential insights for the upcoming budget. The phenomenon of spotless disinflation offers both the bond and stock markets grounds for hope: lower inflation supports bond markets through lower interest rates, and strong economic growth stimulates stock markets. Ironically, some Labour MPs dream of rejoining the EU as an escape mechanism from this complex situation – a misconception that underestimates the seriousness of the economic challenges.