19 May 2026: Second-round effects of the energy price shock won’t show up for another year

Sir Keir Starmer may be a fool, but he is no idiot; he clearly believes he has a mandate to lead the Labour Party through this Parliament and into the next General Election. I doubt he would carry on if he did not feel he had the backing of a significant majority of his backbench MPs, regardless of the noises from several Cabinet members.

He is obviously passionate about being Prime Minister, even though he lacks the support of a seasoned team. It is also true that neither Wes Streeting nor Angela Rayner has sufficient backing to mount a leadership bid right now. When one considers that the Party is at its lowest ebb possible at this moment, and no one has so far mounted a serious challenge, he is justified in both carrying on and refusing to provide a timetable for his departure.

It is admirable that he is trying to continue “doing his job” despite the pressure he currently faces. The results of the recent local elections were unquestionably a disaster from which Starmer feels his Party can recover, even if he may not be the right person to lead them into the 2029 General Election.

It is entirely possible that he feels the rise of Reform UK is a “flash in the pan”, even if it is a significant one. Nigel Farage is not the type of leader that most traditional voters would choose to be Prime Minister, and his numerous “dodgy” deals may yet come back to bite him.

While Farage was an annoyance but little more, he was able to “fly under the radar” of serious scrutiny. Now it seems that almost daily, there are issues that are possibly banana skins which could prove fatal to his leadership.

Although there are some seasoned campaigners behind him, if Farage were forced to step down, the entire Reform bubble would likely burst.

Voters are entitled to ask whether there would be any improvement under either Streeting or Rayner, and while Andy Burnham has been seen as a Messianic figure, his support was out of reach until he was handed the Makerfield constituency; he must still win it, and if he achieves that, he must unite a deeply divided party.

The Prime Minister hosted a reception at Downing Street yesterday, bringing together employers, workers and apprentices to demonstrate how strengthening Britain’s ties abroad is benefiting working people at home.

At a time of global uncertainty, the event was designed to highlight how the Government’s economic plan is providing the foundation for growth, supporting British businesses, protecting working people, and making the UK more resilient to global shocks. That approach was borne out last week, with the UK recording the fastest growth in the G7 ahead of the impact of the Middle East conflict.

This type of event will allow Starmer to demonstrate his Government's potential to turn around a struggling economy while “rallying his troops” for the battles ahead.

BoE's Greene has warned that the Bank’s “pause” should not be mistaken for complacency, suggesting that an interest rate hike may be necessary in the coming months.

She noted that while the global economy has shown resilience, this stability is supported by inventories. She warned that second-round effects of the energy price shock are fundamentally lagging indicators that will likely not fully materialise in consumer price indices and broader economic data for another year.

This lag creates a deceptive environment for monetary policy, leading to what Greene describes as a genuine nightmare for rate setters. A negative supply disruption of this scale forces policymakers to confront a highly toxic economic trade-off: slowing domestic growth paired with surging cost-push inflation. In other words, stagflation.

Greene argues that traditional doctrine, which dictates that policymakers should simply look through temporary supply-side shocks and avoid raising rates in a slowing economy, could be a mistake. She stressed that because the global economy has been battered by three successive negative supply shocks over the last five years, the cumulative damage has structurally altered how businesses and consumers react to rising costs.

According to Greene, evidence on how wages and prices respond to macroeconomic shocks has fundamentally shifted. Rather than treating an energy crisis as a transitory event, workers and companies are now pre-emptively adjusting their wage demands and pricing strategies to protect themselves against persistent inflation. This behavioural shift risks cementing a wage-price spiral that could permanently de-anchor inflation expectations from the central bank’s target.

Sitting back is not an option. Greene believes that rates need to rise, despite the economy's current lack of growth, even though she failed to vote for an increase at the last MPC meeting.

The pound made up some of the ground it had lost recently, due in no small part to the postponement of a U.S. attack on Iran scheduled for today. Despite the turmoil in the government bond market and the issues facing the Labour Party, Sterling rallied to a high of 1.3449 and closed at 1.3433.

The Federal Reserve talks too much about the economy, according to Kevin Warsh, the US Central Bank’s incoming Chairman.

During his confirmation hearing last month, Warsh argued that Fed officials “speak quite frequently” and stressed that “truth-seeking is more important than repetition.”

“If one has a press conference, one should deliver some important news,” he said.

Since the 1990s, Fed officials have regularly weighed in on the economy through media interviews and press conferences, public speeches, lengthy policy statements, and periodic economic forecasts.

Warsh, who officially began his four-year term yesterday, suggested doing away with some of that communication with “a new framework” and “new tools,” though he didn’t go into specifics.

While he has a right to his opinion, so do the Presidents of the Regional Federal Reserves, all of whom are uniquely qualified to provide a view to the market.

However, experts say Warsh isn’t completely off; times of uncertainty make it difficult for Fed officials to predict where the economy and interest rates may be headed. But it would be a major shift for the Fed if Warsh decides to cut back on news conferences or do away with officials’ quarterly economic projections.

“Communication isn’t trivial,” Loretta Mester, who served as president of the Federal Reserve Bank of Cleveland from 2014 to 2024, told CNN. “You’re talking to market participants, you’re talking to the public, you’re talking to Congress, but there may be some enhancements to make communication more effective.”

For most of its 113-year history, the Fed’s interest-rate decisions were somewhat of a mystery. There were no policy statements, routine public comments or news conferences by the chair.

Traders had to infer what the Fed was doing with its benchmark lending rate based on market movements.

That changed under Fed Chair Alan Greenspan, who introduced the post-meeting policy statement in 1994.

Subsequent chairs continued to add to the Fed’s communication arsenal. Ben Bernanke was the first Fed chair to hold a formal news conference in April 2011.

“I have always been a big believer in providing as much information as you can to help the public understand what you’re doing,” he said then, “to help the markets understand what you’re doing, and to be accountable to the public for what you’re doing.”

This is probably true, since leaving the market to speculate over the Fed’s motive for its decision-making would be a dangerous development.

The Federal Reserve Board began this week with a new chair, Kevin Warsh, a Trump appointee.

The Fed is a nonpartisan government body tasked with setting interest rates and controlling inflation. Still, since the start of Trump’s second term, former Fed chair Jerome Powell has faced enormous pressure from the president, including a federal investigation against him that has since been dropped. Can we trust our Central Bank to retain the independence that has made the U.S. the centre of the globe’s financial system?

Donald Trump’s approval rating has fallen to its lowest point in his second term, amid mounting frustration over the cost of living and the US-Israel war on Iran.

As November’s US midterm elections loom, most American voters believe Trump’s decision to go to war with Iran was the wrong choice, according to polling released yesterday.

The US president’s approval rating has declined to 37%, according to the New York Times/Siena poll: the lowest level since his return to office in January 2025. Trump has said he is holding off a military attack on Iran planned for today, at the request of Gulf states, as "serious negotiations are now taking place".

In a post on Truth Social, he said he had been asked to do so by the leaders of Qatar, Saudi Arabia and the United Arab Emirates.

He said he had been informed that a deal would be made that is "very acceptable" to the US, adding there would be "NO NUCLEAR WEAPONS FOR IRAN!"

But he warned the US would be ready to "go forward with a full, large-scale assault of Iran, on a moment's notice" if there was no acceptable deal.

A senior Iranian military commander told the US not to make "strategic mistakes and miscalculations again".

The dollar index lost ground as the oil price fell following Trump's announcement of a pause in a planned attack on Iran. It fell to a low of 98.95 and closed at 98.98.

The euro is struggling to sustain meaningful upward momentum against the US dollar as cautious market sentiment continues to cap risk appetite. Despite occasional relief rallies, the common currency remains constrained by a combination of factors, including persistent US dollar strength, diverging monetary policy expectations between the European Central Bank and the Federal Reserve, and broader risk aversion across global markets.

The Euro gained some relief yesterday after Trump’s apparent postponement of an attack on Iran scheduled for today.

It rallied to a high of 1.1661 and closed at 1.1656.

Germany has warned of the economic consequences of the war in Iran and a potential blockade of the Strait of Hormuz ahead of a meeting of G7 finance ministers in Paris.

The war is a “serious threat to the global economy” and is causing massive damage to economic development, German Vice Chancellor and Finance Minister Lars Klingbeil said before departing for the talks.

Everything must be done to “permanently end” the war, stabilise the region and ensure free sea lanes. “In doing so, our path as Europeans remains clear: We prioritise cooperation over confrontation,” the German Press Agency dpa quoted him as saying.

At the G7 finance ministers’ meeting, which began yesterday, participants are expected to focus on the economic impact of the Middle East conflict and possible consequences for global trade. The Strait of Hormuz remains one of the world’s most important shipping routes for oil and gas.

Klingbeil said the current crises underscore the importance of Germany and Europe becoming “more independent and resilient,” particularly regarding raw materials, energy and supply chains.

Meanwhile, ECB President Christine Lagarde has said she is closely monitoring recent pressure in global bond markets. She explained in simple terms that worrying about financial risks is part of her job.

She made this comment when reporters asked her about the bond market sell-off. Speaking at the meeting of G7 finance ministers, she said that central bankers must always stay alert to changes in the financial system.

In recent days, bond markets around the world have been unstable. Prices have been falling, and borrowing costs have been rising. This has happened because investors are reacting to global uncertainty and economic pressure.

Lagarde’s calm response was meant to reassure people and investors; instead of showing fear or panic, she emphasised that such market movements are normal in times of global uncertainty.

Have a great day!