Signs of a UK inflation cool-down

This is an audio transcript of the FT News Briefing podcast episode: ‘Signs of a UK inflation cool-down’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, July 20th, and this is your FT News Briefing.

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Ukraine’s armed forces are having a hard time with Russian mines, and Sunday’s election could prove pretty tough for the prime minister of Spain. Plus, it looks like the UK is finally getting some relief from high inflation. But the Bank of England isn’t quite out of the woods yet.

Katie Martin
So let’s not assume that one positive number, one bit of good news, is the start of something bigger. Let’s be a little bit more patient than we might have been in the past.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Netflix added 6mn new subscribers last quarter, more than double what analysts expected. The streaming service released its second-quarter earnings yesterday, and it said that its crackdown on password sharing contributed to subscriber growth. It basically told customers, “If you want to share a password, then you need to fork over an extra eight bucks a month to add a person outside their home” — and it worked. Revenue rose last quarter, but it came up short of forecasts. Netflix shares dropped nearly 8 per cent after the bell on Wednesday.

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UK inflation for June fell more than expected. It fell to 7.9 per cent, nearly a full per cent lower than May. And oh boy, did investors like that. Here to talk about the celebrations, the FT’s markets editor Katie Martin. Hi, Katie.

Katie Martin
Hey, how you doing?

Marc Filippino
I’m doing well, but probably not as good as you guys. I mean, UK inflation had a 15-month low in June. I mean, is there dancing in the street? Is there a party in the office? What’s going on?

Katie Martin
We have got some cake in the newsroom, but it’s not because of the inflation numbers. Yeah, it’s a very nice number. And I think, you know, certain investors have got themselves into a little bit of a doom loop.

Marc Filippino
How so?

Katie Martin
You know, not without reason, but thinking inflation is just so much higher than in the rest of the developed world. And the UK does have certain pressures that other countries don’t have. And how on earth are we going to get this number to come down? And now, you know, it’s never worth reading too much into one number, but the market is definitely happy about the number, 7.9 per cent in June. Last time around it was 8.7 and the market had been expecting 8.2. So it’s an even better number than people had hoped for. So that’s why we have seen, you know, a decent market reaction.

Marc Filippino
Now, we should note that core inflation only fell slightly. Core inflation being the cost of things that aren’t volatile, stuff like food and energy. But that being said, do investors see this as a turning point?

Katie Martin
Potentially. As I say, I don’t want to get overly excited about just one number. But if you look at the UK government bond market, the reaction there definitely tells you that investors think, “Mmm, is it possible we’ve seen the peak here?” So you look at the yields on 10-year gilts and on two-year gilts, they’ve come down substantially. And that tells you the prices have gone up, which in turn tells you that people think there’s a chance that the Bank of England might not need to be quite so aggressive with interest rate rises as it previously was. So the markets backed away a little bit from the view that the next rise in interest rates might be half a percentage point. Now sees it as somewhat more likely that it will be a quarter of a percentage point. This is the market’s way of saying, “Look, let’s cross our fingers and pinch our noses and hope that maybe, you know, the worst is behind us”. You know, the great British stagflation panic kind of might be over.

Marc Filippino
So Katie, what you’re saying is that, if I got this right, this is an optimistic drop. Nearly a full per cent. Still very high. And it’s . . . overall, I guess if we have to take a snapshot, it’s overall good news for different parts of the market.

Katie Martin
Yes, exactly. So different parts of the UK stock market have reacted quite well to this. Partly that’s because sterling has fallen. So a massive chunk of all the revenues that flow into companies that are in the FTSE 100 come from overseas and in foreign currencies. So a weaker sterling is, you know, flatters those results. But in addition, property groups have done very well off the back of this. You know, buyers or potential buyers of properties have been really spooked by what’s been happening with mortgage rates recently. They’ve just been rocketing higher. So this kind of dose of relief that maybe they’re not going to get quite as high as we’ve feared has been good for shares in housebuilders like Persimmon, Barratt, Taylor Wimpey and they make up a decent proportion of the UK stock market. So all in all it’s definitely good news. It’s just that the analysts and investors that we speak to are saying, “You know, let’s keep our cool.” 

Marc Filippino
Katie Martin is the FT’s markets editor. Thank you, Katie.

Katie Martin
Pleasure.

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Marc Filippino
Ukraine admitted recently that its counteroffensive wasn’t making the progress it initially hoped for. A big reason for that: Russian forces had time to put down extensive minefields, and that’s making it hard for Ukrainian forces to make a breakthrough. Chris Miller just got back from visiting Ukrainian troops on the front line, and he joins me now. Hi, Chris.

Christopher Miller
Hi, Marc.

Marc Filippino
So, Chris, what was the morale like in the places that you visited?

Christopher Miller
Ahead of the counteroffensive, morale was high. Their expectations were that they would be able to wrest back a significant portion of a Russian-occupied territory. They have not been able to break through these really dense Russian defences along the front line. In fact, they’re taking a lot of casualties. So morale has been zapped a little bit here. I spoke with a guy named . . . a soldier named Sultan. He was telling me, as he was recovering from a concussion that he suffered from a mine blast, that a lot of his guys were exhausted and they were tired. They were doing what he described as these dismounted operations that were really slow. And they didn’t have any great plan to how they were going to make progress other than inching forward metre by metre in these really dense minefields.

Marc Filippino
So what do they do then? Is there some way to circumvent the mines or attack Russian forces in a different way?

Christopher Miller
You know, they really just have to take it head on. They are using some of their longer range artillery and trying to soften up Russian positions and sort of dislodge them to make it easier for them to, when they get to these front lines, not have to deal with a lot of the anti-tank weaponry that they’re being faced with in these wide open spans of Ukraine south. But really, you know, to move forward, you’ve got to take one step ahead. And these guys are having to do it in these dense minefields.

Marc Filippino
Chris, what are the factors that can actually make a difference for Ukraine in the near future then?

Christopher Miller
What could really make a difference for Ukrainian soldiers is more western artillery. Artillery is key to softening those Russian lines and helping really to distract Russian soldiers from these Ukrainian engineers and minesweepers and infantry that are forced to move so slowly forward towards Russian lines. They would love to have long-range missiles and these would help to hit Russian logistical centres, even things . . . key infrastructure like the Crimea bridge, for example, which is key to Russia resupplying its forces in the south. And certainly the Ukrainians would like F-16 jets. But we know that this is probably something that’s a long ways off. But the Ukrainians say those really would help in these complex combined forces operations that they’re being forced to undertake right now on the southern and eastern front lines.

Marc Filippino
Chris Miller is the FT’s Ukraine correspondent. He’s based in Kyiv. Thanks, Chris.

Christopher Miller
Thank you.

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Marc Filippino
Spain is facing a pivotal vote on Sunday. Pedro Sánchez, the prime minister, called the snap election after his centre-left Socialist party had a miserable showing during May’s regional election. And if polls are correct, he’s headed for a defeat on Sunday. One of the main reasons for his party’s loss of popularity is his decision to enter a coalition with the leftwing separatist Bildu party, which has never apologised for years of terrorism.

Pablo Simon
The situation have improved a lot. The memory of the terrorism and what happened, even so, it is still affecting the mobilisation of the right.

Marc Filippino
That’s Pablo Simon, a political scientist in Madrid and one of Spain’s leading political analysts.

Pablo Simon
Because in general, everything that is related with the territorial conflict, with the terrorism and so on tends to divide the left, and for the right, it’s something that mobilise them a lot because they consider that the pro-independence party want to destroy Spain and in specific they’re still having the same memory and the same will of their former terrorist of Eta.

Marc Filippino
Simon says the centre-right People’s party looks set to win on Sunday under its new leader, Alberto Núñez Feijóo.

Pablo Simon
Núñez Feijóo we can say that he’s a traditional conservative leader in the terms of economic and more pro-business agenda. He will plan, as the Popular party always do, a kind of redaction in taxation. So in general, more liberal agenda. But in terms of social rights, I would say that he’s, to some extent, moderate.

Marc Filippino
That was Spanish political scientist Pablo Simon. He was this week’s guest on the FT’s Rachman Review podcast, which comes out on Thursdays. You can find this week’s episode in the show notes.

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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