22 August 2025: Reeves is suffering a “Trilemma”

The rise in inflation that was seen when the latest data was revealed this week will go a long way towards determining the rise in the level of the state pension next Spring.

As part of the triple lock on pensions, the Government uses the September inflation report as the basis for any increase.

Chancellor of the Exchequer Rachel Reeves is facing a three-pronged set of issues as she prepares her Autumn Budget.

She will take some comfort in the latest set of public sector borrowing figures, which show the government managed to raise more taxes and spend less on debt interest last month.

The £1.1 billion borrowed in July is generally one of the more volatile in the fiscal year, as it is traditionally the month that self-assessment tax payments are logged in the Treasury’s books. The Office for National Statistics (ONS) said that delayed tax returns this year will mean some of the revenues will also show up in August’s numbers.

Borrowing forecasts have been constantly exceeded this year, so the July numbers will offer some respite to the Chancellor, who is trying to get the public finances on an even keel. June’s deficit was revised up slightly by the ONS.

The goal is to bring in enough tax revenues to pay for all departmental spending by the end of the decade. As things stand currently, using that current measure, which only needs to be met in 2030, the government is facing a £5.6 billion deficit.

It is unlikely the UK will experience a recession this year, although economic growth is expected to be slow.

The UK economy grew in the first quarter of 2025, exiting the technical recession experienced in the last half of 2024. The economy has continued to grow in Q2, albeit at a slower pace. While the outlook remains subdued, most economic forecasts predict the UK will avoid a recession this year.

Despite the generally optimistic forecasts, some economists point to potential challenges. The current international political landscape and trade policies could negatively impact UK exports and overall economic activity, while Inflation could prove more persistent than anticipated, hindering a swift recovery.

Bank of England Governor Andrew Bailey is attending the Fed’s Jackson Hole Symposium, which had its opening reception last evening. Central Bankers from around the world will be eager to hear Jerome Powell’s opening address later today to glean some insight into the Fed’s intentions.

The pound has lost ground during every trading session this week. Yesterday, it fell to a low of 1.3405 and closed at 1.3413.

The U.S. economy appears to be in a state of flux as it continues to receive mixed signals from various sources.

No one can say with any certainty the level of growth expected to be seen in the fourth quarter of the year, nor the true direction of interest rates.

Even the minutes of the latest FOMC meeting spurred confusion since, for the first time this century, there were two dissenting voices when a vote on a rate cut was called.

Christopher Waller, apparently the President’s choice to replace Powell and Michelle Bowman, the other Trump appointee as a Fed Governor, both voted for a twenty-five basis point rise. They were outvoted nine votes to two.

Yesterday, Trump announced he has selected Stephen Miran, current chair of the Council of Economic Advisors, to serve on the Federal Reserve Board of Governors, replacing Adriana Kugler.

“He has been with me from the beginning of my Second Term, and his expertise in the World of Economics is unparalleled. He will do an outstanding job,” Trump said. Miran likely will serve in the position only until January 2026, the balance of Kugler’s unexpired term, and not as a potential replacement for Chair Jerome Powell.

Jerome Powell's speech will be the main event of the opening day in Jackson Hole, and he's expected to discuss the Fed's stance on interest rates, potentially providing clues about a September rate cut. He will likely address the ongoing dilemma facing the Fed: taming inflation while supporting employment.

The theme of this year's symposium is "Labour Markets in Transition: Demographics, Productivity, and Macroeconomic Policy." The theme, according to the Kansas City Federal Reserve President Jeffery Schmid, is "Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy." Recent data showing a weaker US labour market, combined with sticky inflation, will likely be a key topic of discussion.

Powell may discuss proposed changes to the Fed's framework for economic analysis. The production of data has been under scrutiny recently following the President’s sacking of the head of the Bureau of Labor Statistics. There has also been a decline in participation in Fed surveys about the economy recently. Powell would like to know why.

Financial markets are likely to react to Powell's tone, particularly his comments on the timing of rate cuts, potentially influencing stock, bond, and currency markets. A dovish tone could boost risk assets, while a hawkish tone could spark volatility.

The dollar index made further ground yesterday, rising to a high of 98.68 and closing at 98.66.

During its relatively short life, the European single currency has seen several threats to its very existence. The global downturns of 2008 and, more importantly, 2012 have seen the currency require life support to survive. That support came in 2012 from a speech by then ECB President Mario Draghi, who told the market that he would do “whatever was necessary to ensure the Euro’s survival.

The Pandemic and its aftermath saw inflation skyrocket following the significant level of support that was pumped into the economy, while the Russian invasion of Ukraine saw food and energy prices again drive inflation higher and derail the German economy.

It is only a matter of luck that the rest of the region was growing at above-average rates, that the Eurozone didn’t stumble again.

The other large economies, Spain in particular, have seen above-trend growth so far this year. This has compensated for the German morass, which is likely to see GDP shrink for the third consecutive year.

Germany’s reliance on energy-hungry heavy industry is being successfully challenged by China, which does not feel the need to limit the emission of greenhouse gases.

The Change of Government in Germany gave the region a lift as Friedrich Merz introduced several measures designed to bolster the economy. While these were welcome, the entire economy needs to be completely reshaped as other, smaller economies have done, moving away from manufacturing and into service-based activities.

While it seems defeatist to “leave the field open” to the Chinese, in this case, it seems that “discretion may be the better part of valour”, avoiding facing challenging Chinese hegemony head-on.

The region is performing another comeback, but this time there is significantly more caution than has been seen previously. The ECB, under the leadership of Christine Lagarde, has seen its influence, using diplomacy, in which Lagarde is well versed, rather than economic development, which she is not.

Lagarde will be present in Jackson Hole today to hear Powell speak, but having cut interest rates by 200 basis points in the last year, the ECN will be hoping that its own economy won’t suffer the wreaking of its labour market which has been at historic highs over the past eighteen months.

The Euro is reacting to the perceived shift in monetary policy between G7 members. The U.S. and UK are struggling to contain inflation, while in Europe, price rises are now contained at or close to the Central Bank’s 2% target.

Yesterday, the common currency fell again, this time to a low of 1.1601 and closed at 1.1606.

Have a great day!