The headline UK Consumer Price Index rose in line with expectations, marking an acceleration in inflation to 1.5% y/y.

At the same time, the Producer Price Index significantly exceeded expectations, reflecting domestic pressures that soon promise to be passed on to consumers. Its year over year pace of growth reached 9.9% - close to the peaks of 2017 when it peaked at 10.3%.

Despite the magnitude of inflation, its nature gives little reason for the Bank of England to tighten monetary policy now. The rise in prices is caused by supply shortages in some sectors and by companies wanting to get back into the battle for market share amid the easing of pandemic restrictions.

Supply has not had time to adjust to demand, but until the economy and employment have broken through pre-coronavirus highs, it looks more like a morning jam than a steady increase in traffic.

So perhaps the Bank of England, as well as the ECB and the Fed, will look the other way until employment returns to early 2020 levels.

Markets cling to optimism

The financial markets were undergoing a big test of optimists yesterday. So far, they seem to have claimed local victory.

During the day, the Nasdaq almost fell out of its 9-month uptrend. As a week ago, it got support on a decline below 13000 and closed the day with minor growth, recovering its 2% intraday drop, gaining most of the way through the active trading session in New York.

Intraday on Wednesday, the dollar also received support from the sell-off, managing to get back above 90 on the DXY, a basket of the world’s six most popular currencies. However, the battle for this support level continues. The move will be stronger after the surrender of one side, bulls or bears.

Gold received support intraday. Once again, there has been talk of institutional investors returning to gold from bitcoin. That might well be true, as gold has returned to growth since the beginning of April, while bitcoin lost momentum in the middle of last month.

It is very likely true that Americans are in no hurry to look for a new job, receiving increased benefits and still having a record cushion of cash. But do not assume that Americans have become unusually lazy over the past year, as many simply do not have the opportunity to go to work due to pandemic-related restrictions.

Some parents look after their children at home, while schools and kindergartens remain closed. Increased payments and accumulated cash from government cheques allow people to stay out of work longer. Without them, people would look for work more actively (i.e. they would be quicker to accept employers' offers).

But it would be a blow to American spending, which would hurt the US economy even more.

The US now has record retail sales and record savings, with employment 8 million below pre-pandemic levels and weekly benefit recipients above March 2020 levels. This is only possible because of the government's boost.