OECD: Don"t raise taxes yet! The OECD is also urging governments to resist hiking taxes or cutting spending to address the huge borrowing run up during the pandemic. My colleague Phillip Inman explains: Governments must resist imposing spending cuts and hefty tax rises before their economies have recovered from the effects of coronavirus lockdowns, a leading global thinktank has warned. In its quarterly health check of the global economy, the Organisation for Economic Co-operation and Development (OECD) said it would be necessary to continue borrowing extra funds into next year to support the worst-hit households and businesses despite concerns about mounting public sector debts. In a clear shot across the bows of governments contemplating tax rises, including the UK, the OECD said public spending was needed to support a rebound in growth that had begun to slow in many countries since June, mainly on fears of further lockdowns this winter. OECD: Covid slump will be less severe than feared Newsflash: The global economy is recovering faster from the Covid-19 pandemic than feared, according to the Organisation for Economic Co-operation and Development. The Paris-based group has hiked its economic forecasts, noting that China and the United States are in better shape than it thought three months ago. The global economy is now expected to shrink by 4.5% this year -- still a very serious slump, but not as bad as the 6% decline forecast in June. The OECD says: The drop in global output in 2020 is smaller than expected, though still unprecedented in recent history.... Output picked up swiftly following the easing of confinement measures and the initial re-opening of businesses, but the pace of the global recovery has lost some momentum over the summer months It expects the world economy to strengthen in 2021, growing by around 5% - although this outlook is “exceptionally uncertain” while Covid-19 is spreading around the globe. The OECD also predicts wild divergences across the global economy this year. China is expected to grow by 1.8%, while the US economy is set to contract by 3.8%. The eurozone is forecast to shrink by 7.9%, while the UK economy faces a 10.1% contraction. Back in the City, e-commerce player Hut Group has pulled off the biggest UK stock market float since the Royal Mail was privatised in 2013. Hut owns online retail sites Lookfantastic, Glossybox, Zavvi and Coggles website, plus beauty brands including ESPA and Illamasqua and sports nutrition brand Myprotein. It raised £1.88bn through today’s float, which valued the firm at £5.4bn.... and shares are already surging around 25%. My colleague Jasper Jolly explains: The biggest London stock market debut since 2013 has netted the company £920m while shareholders led by the group’s founder, Matthew Moulding, will share gross proceeds of £961m. Moulding has previously said the timing of the float was prompted by private equity backers wanting to sell their investments. The private equity investors KKR have sold all their shares during the flotation. The valuation propelled Hut Group into the ranks of Britain’s most valuable public companies. However, it does not qualify for the FTSE 100 index because of an unusual governance structure that prevented it from gaining a premium listing. Moulding has continued as joint chairman and chief executive of the company, and will retain a “founder’s share”, meaning he will retain control for three years. UK inflation slides: What the media say The BBC’s Faisal Islam writes that the slide in inflation was due to the “extraordinary action taken to try to get Brits back into town centres”. The fall to 0.2% is overwhelmingly the result of the impact of Eat Out to Help Out and the temporary VAT cut for the hospitality sector. It is a statistic that reaffirms what we already know, but also reflects some freakishly temporary factors. The chancellor’s restaurant subsidy scheme is already over, the VAT cuts expire in January. Inflation is likely to remain lower than its 2% target, except in the case of a further sharp fall in the value of the pound - for example, after a disorderly end to the post-Brexit trade talks. Either way, the Bank of England has more space for extra support to the economy in the coming months, without risking a surge in inflation. The drop in UK inflation puts more pressure on the Bank of England to stimulate the economy, says the Financial Times, which adds: UK core inflation, which excludes energy, food, alcohol and tobacco, slowed to 0.9 per cent in August from 1.8 per cent in the previous month. Prices in restaurants and hotels contracted 2.8 per cent in August, compared with the same month last year, the first annual contraction for the sector since the series began in 1989. This reflects the effect of the government’s ‘Eat Out to Help Out’ scheme, which offered discounted meals in restaurants during August. Reuters concurs, saying: Discounts for more than 100 million meals were claimed last month through the government’s “Eat Out to Help Out” programme, which offered diners a state-funded price reduction of up to 10 pounds ($12.89). While this prompted an unusually large fall in the rate of inflation, the effect of the coronavirus pandemic on the economy and a coming surge in unemployment look likely to keep consumer prices in check. Bloomberg points out that air fares saw an unprecedented drop (as August is usually an expensive time to fly): Prices at restaurants and cafes fell 5.5% from July and were down 2.6% from a year earlier. The decline reflected the fact that consumers paid a subsidized rate during the month, with the government making up the rest. There was also downward pressure from air fares, which posted the first decline for the month on record after coronavirus restrictions brought international travel to a standstill. Prices fell 1%, compared with a 22.4% increase a year earlier, with the drop driven by European routes, the ONS said. The EY ITEM Club predicts that UK inflation will hover just above 0% for the rest of 2020, saying: Price conscious consumers, excess capacity and limited earnings are likely to limit inflation in the near term. Europe’s stock markets have made an underwhelming start to trading, as investors wait to hear from the US Federal Reserve tonight. In London the FTSE 100 index has dipped by 6 points, or 0.1%, to 6099 points. Mining companies and retailer Kingfisher are among the risers. However, jet engine maker Rolls-Royce has dropped by 3.8% - falling to 195p, which I think is the lowest level since 2005. Shares were worth nearly 700p at the start of the year, before the Covid-19 pandemic crushed demand for new engines and maintaining work. Here’s our news story on the UK’s inflation figures: Computer game prices bucked the downward trend last month, perhaps because of the lockdown has created a boom in home gaming. Prices in the ‘games, toys and hobby’ category jumped by 3.8% year-on-yer in August - driven by computer game downloads. The ONS says: It is possible that prices have been influenced by the coronavirus (COVID-19) lockdown changing the timing of demand and the availability of some items, particularly consoles. However, it is equally likely to be a result of the computer games in the bestseller charts. Price movements for computer games can often be relatively large depending on the composition of these charts. But while computer game prices rose, package holiday prices fell. UK inflation falls: What the experts say Tom Stevenson, investment director at Fidelity International, says the UK is facing ‘disinflationary’ pressures - which go beyond one month’s cheap meal offers. “Eat out to help out was the main influence on the lowest inflation rate for nearly five years. But disinflationary forces were evident across the economy as fears about an autumn surge in unemployment held back consumer confidence. Food, clothing and transport all exerted downward pressure on prices. It remains to be seen if this is part of continued downwards movement or just a monthly dip. “Weak demand should ensure that inflationary concerns remain on the back burner for now and price growth will track closer to zero through to the end of the year. Rising coronavirus cases, the reintroduction of restrictions, negative wage growth and the prospect of half a million redundancies as the furlough scheme winds down this autumn will all play a part in keeping consumer spending subdued. Other pressing issues, like a possible collapse in the Brexit talks and consequent pressure on sterling, will overshadow any inflation worries for now.” The TUC says the UK economy is suffering from a lack of government stimulus: Neil Birrell, chief investment officer at Premier Miton, points out that August’s inflation reading is actually a little higher than expected “The inflation data in the UK surprised on the upside. The core year-on-year CPI was up 0.9% against expectations of 0.5%. Rising inflation has been much discussed as the inevitable consequence of all the stimulus being injected into the economy. Policy makers won’t be worried about this number, they are more likely to be pleased there is activity in the economy.” Yael Selfin, chief economist at KPMG UK, predicts inflation will remain low for some time: “The Eat Out to Help Out scheme and the cut to VAT for hospitality businesses helped push consumer inflation to just 0.2% in August, for the first time since December 2015. “The low inflation will serve to protect households’ spending power at times when many are feeling under pressure. “While we expect an initial bounce back in inflation in September, as the Eat Out to Help Out scheme comes to an end, overall inflation is likely to remain well below the Bank of England’s target for some time.” Prices across UK hotels and restaurants were 2.8% lower than a year ago in August, the ONS adds. That’s the first negative inflation reading across the sector in at least 30 years. The ONS explains: The restaurants and hotels group made a downward contribution of 0.27 percentage points in the latest month reflecting a negative 12-month inflation rate of 2.8%. This is the first time that the 12-month rate has been negative since the series began in 1989. The data reflect the effect of the Eat Out to Help Out Scheme. Under this, consumers could get a 50% discount (up to a maximum of £10 per diner) on food and non-alcoholic drinks to eat or drink in every Monday, Tuesday and Wednesday in August at participating establishments. The reduction in Value Added Tax (VAT) from 20% to 5% on the hospitality sector also contributed to the fall in prices. This chart shows the details: Charts: How UK inflation tumbled This chart from today’s inflation report shows how Rishi Sunak’s discount meal scheme pulled inflation down last month. And here’s the result - the lowest annual inflation rate in almost five years: Introduction: UK inflation tumbles Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business. Inflation across the UK has fallen sharply, as the government’s Eat Out to Help Out discount meal scheme drove down the cost of living. Figures just released show consumer prices rose by just 0.2% year-on-year in August, with cheaper clothing and air fares also pulling the CPI down according to The Office for National Statistics. That’s the lowest inflation rate since late 2015, and sharply down on July’s inflation rate of 1%. The one hundred million meal deals paid for by the Treasury were the primary cause of this easing of the cost of living, as people flocked to restaurants, bars and cafes to save up to £10 per head. Falling prices in restaurants and cafes, arising from the Eat Out to Help Out Scheme, resulted in the largest downward contribution (0.44 percentage points) to the change in the 12-month inflation rate between July and August 2020. Other smaller downward contributions came from falling air fares and clothing prices rising by less between July and August 2020 than between the same two months a year ago. The largest, partially offsetting, upward contributions came from games, toys and hobbies, accommodation services, road transport services and second-hand cars. More details and reaction to follow... Also coming up today The US Federal Reserve releases its latest economic forecasts tonight, at the end of its latest monetary policy meeting (which began yesterday). Fed chair Jerome Powell will also hold a press conference, where he’s likely to sound rather dovish. Last month he announced a new ‘average inflation targeting regime’ which would give him more leeway before tightening monetary policy. Powell will also be keen to sound uncontroversial ahead of the US election in two months time, so investors should contain their excitement.... As Adam Cole of RBC Capital Markets puts it: No policy changes are expected from the Fed and given Powell’s recent speech at Jackson Hole, there should be relatively little for the statement or press conference to add. While acknowledging the more rapid improvement in the economic backdrop, we expect the message to remain one of caution. The agenda 7am BST: UK inflation report for August 10am BST: Eurozone trade balance for July 1.30pm BST: US retail sales 3.30pm BST: US weekly oil inventory statistics 7pm BST: Federal Reserve interest rate decision 7.30pm BST: Fed chair Jerome Powell holds press conference