UK markets were little changed this week, with the FTSE 100 Index rising 0.05% to trade at 9,245 points at the time of writing. The UK will be hit by the highest inflation in the G7 this year, as the country absorbs the impact of higher payroll taxes, an increase in the minimum wage and rises in regulated prices, the Organisation for Economic Co-operation and Development (OECD) forecasts have shown.
Consumer prices will rise 3.5% in 2025, up from 2.5% last year, and will remain well above the Bank of England’s 2% target in 2026, the Paris-based organisation said on Tuesday. It also predicted UK growth of 1.4% this year, up from 1.1% last year, the second fastest after the US among G7 countries. However, next year’s 1% growth rate will put the UK behind the US, Canada and Germany.
The OECD’s new outlook comes as Chancellor, Rachel Reeves is widely expected to raise taxes further in a difficult Budget in November, following disappointing productivity data and a deterioration in the public finances. An influential think-tank has urged the Chancellor to break one of Labour’s key manifesto pledges by raising income tax in her November Budget, while at the same time providing workers with some relief by cutting national insurance.
The Resolution Foundation has proposed increasing income tax by 2%, but also reducing the rate of employee national insurance by the same amount, saying the changes would raise £6 billion a year for the Treasury. The think-tank argued that the measures would shift the tax burden away from workers and on to pensioners, landlords and the self-employed.
UK private sector activity expanded less than expected in September and at the slowest pace since May, as falling overseas trade, worsening business confidence and steep job losses hit businesses that are growing anxious about potential tax rises in the autumn budget.
Elsewhere, the Bank of England’s chief economist Huw Pill has warned that the central bank risks worsening gilt market problems in the long run by trying to ease bond turbulence with a slowdown in its balance sheet reduction programme. Pill argued that the Bank of England should continue with its “gradual and predictable” balance sheet reduction, focusing on its short-term interest rate as the key tool that it varies in response to changing conditions.
Commodity markets
In the commodity markets, Brent crude futures traded around $69.5 per barrel on Friday and are set for a weekly rise, driven by a surprise drop in US weekly crude inventories and as Ukraine’s attacks on Russia’s energy infrastructure pushed Moscow to restrict fuel exports.
Russian Deputy Prime Minister, Alexander Novak said on Thursday that the country would introduce a partial ban on diesel exports until the end of the year and extend an existing ban on gasoline exports. The fall in capacity to refine oil has pushed Moscow closer to reducing crude output. Several Russian regions are facing shortages of certain grades of fuel.
Stronger than expected US economic data released this week that could make the Federal Reserve more cautious about cutting interest rates capped some gains. The Kurdistan Regional Government’s announcement on Thursday that oil exports would resume within 48 hours also pressured prices.
Gold prices traded around $3,750 an ounce on Friday and are set for another rise this week, as geopolitical and economic tensions heightened safe haven demand, while investors awaited an upcoming US inflation report for clues on the Federal Reserve’s monetary policy trajectory.
Equity markets
US equity futures were mixed on Friday as investors awaited the Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation gauge, for fresh policy guidance. In Thursday’s regular trading session, the Dow Jones Industrial Average fell 0.38%, while the S&P 500 and the Nasdaq Composite both declined by 0.50%.
The US economy grew more than previously estimated in the second quarter, after figures on consumer spending were revised sharply higher. GDP increased at an annualised rate of 3.8% in the three months to the end of June, the Bureau of Economic Analysis said in its third estimate of growth for the second quarter. That was up from 3.3% in the second reading, though first quarter growth was revised lower to a 0.6% contraction.
Consumer spending was revised significantly higher, growing at an annualised rate of 2.5%, compared with 1.6% in the previous estimate. The Bureau of Economic Analysis said the revision was driven by increases in purchases of transportation and financial services, as well as insurance. This was partly offset by a downward revision to exports.
Federal Reserve chair Jerome Powell has pushed back on expectations of more interest rate cuts in the coming months, saying policymakers faced a “challenging situation” in deciding whether to prioritise fighting inflation or protecting jobs. Many investors are banking on another two quarter-point cuts before the end of 2025. However, Powell signalled this week that those moves were far from a done deal, saying if central bankers ease too aggressively, then they could leave the inflation job unfinished and need to reverse course to restore price increases to their 2% goal.
Inflation has been above the central bank’s target since 2021 and is expected to rise further as President Donald Trump’s tariffs push up prices for US shoppers.
Elsewhere, President Trump said the US would impose 100% tariffs on imports of branded or patented drugs, unless a company was building a plant in America. The tariffs will not apply to generic pharmaceuticals, which account for the vast majority of imports to the US. In an effort to win favour with the White House and avoid potential tariffs, several major drugmakers have in recent months announced plans to invest in the US.
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