22 May 2025: Sterling and inflation rise to their year’s high

It is not a good look for a senior member of the Cabinet to be undermined by both the Prime Minister and his deputy, but that appears to be the fate of Rachel Reeves.

Still reeling from the increase in the headline rate of inflation from 2.6% in March to 3.5% in April, she was hit by Keir Starmer telling Parliament that the withdrawal of the Pensioner’s Winter Fuel Payment is going to be “rolled back” this Autumn, while It is rumoured that Angela Rayner, the Deputy Prime Minister, called for taxes to be increased in the Spring Budget delivered by Reeves in March.

Rayner appeared to urge Reeves to raise taxes by three to four billion pounds rather than cut welfare payments in a memo that has been leaked to the press.

It is not unusual for Ministers to suggest policy changes within an agreed-upon framework, but making such a suggestion public could well illustrate some disquiet among the Senior Leadership regarding Reeves’ position.

The document, entitled “alternative proposals for raising revenue”, argued the measures would not breach Labour’s 2024 manifesto pledge not to raise taxes “on working people”.

Suggestions included ending inheritance tax relief on shares listed on the smaller AIM stock market, scrapping the £500 dividend tax-free allowance, and freezing the threshold at which the 45p additional income tax rate applies. This would have seen some pensioners begin to pay the higher rate.

The tension reflects broader discomfort among some Labour MPs over the direction of economic policy, with criticism in particular over the chancellor’s decision to scale back the overseas aid budget and introduce tighter eligibility tests for personal independence payments.

The rise in inflation last month was driven by higher payments for gas, electricity, water and transport in ‘awful April’.

CPI rose to its highest rate in more than a year after dramatic increases in water bills, energy costs and council tax.

A rise in employer national insurance contributions and an increase in the national minimum wage also put pressure on companies to raise prices by more than City analysts had forecast.

The surge in the consumer prices index (CPI) recorded by the Office for National Statistics came after a decline in the rate over the first quarter of the year to 2.6% in March.

Much of the increase was caused by higher payments for gas, electricity, water and transport, amid several bill rises that led to last month.

The pound surged to its highest level this year versus the dollar, reaching 1.3439 before running out of steam to close at 1.3420. City analysts believe that the chance of another rate cut at the next meeting of the Bank of England’s Monetary Policy Committee has been drastically reduced.

There has been a great deal of discussion about the erosion of the independence of the Federal Reserve since Donald Trump returned to the White House.

On one hand, we have hardened right-wing members of the Republican Party who feel that the President should at least oversee such an important part of the economy and monetary policy, while more traditional politicians on Capitol Hill believe that an independent Central Bank is a pillar of the checks and balances that make up the fabric of Government.

Michelle Bowman has been President Trump’s choice to become Vice Chairman of the Federal Reserve, but her credibility has been damaged by being seen as “Trump’s girl”.

Bowman’s been known to stray from rate-cutting consensus on occasion, but more troubling to the rigid minds inside the central bank, Bowman is a bit more sceptical about the worth of bank capital requirements. Bowman’s scepticism is warranted, which is not a political assertion. In truth, it’s just a comment that markets are incredibly complicated.

Well-known Fed critic Elizabeth Warren is not known for favouring Jerome Powell’s methods, but is a staunch believer in Fed independence. She sharply criticised Bowman’s stance on banking supervision, arguing that looser rules are ill-timed amid the market turmoil linked to Trump’s tariff policies.

“President Trump is fanning the flames of disaster with his mismanagement of the nation’s economy,” Warren said. “Instead of showing up with the fire department, Governor Bowman brings a can of petrol.”

Donald Trump is on the verge of securing passage of his flagship tax and spending legislation in the lower chamber of the US Congress.

The sprawling bill, which would slash US taxes and increase federal debt, is the centrepiece of the president’s second-term agenda and has been the topic of a fierce battle among Republicans in the House of Representatives.

Congress is divided over spending on health and social care programmes and fears over the country’s ballooning debt. The president has repeatedly intervened to pressure them on to pass the bill, last week, warning that “we don’t need grandstanders in the Republican Party”.

The thousand-page legislation dubbed the “One Big Beautiful Bill Act” by Trump extends many of the 2017 tax cuts passed during his first term, which are due to expire at the end of the year.

These include individual income tax cuts and increased child tax credit, and eliminating taxes on tips and overtime pay, central campaign pledges during last year’s election. Other measures include increases in estate and gift tax exemptions and a broad array of business tax breaks, as well as more than $50bn to boost border security, including further construction of a wall along the border with Mexico that Trump has vowed to complete.

Richmond Federal Reserve Bank President Thomas Barkin said yesterday that they are watching the consumer activity most closely because that's the biggest part of the economy.

The dollar index has consolidated at lower levels, breaking back through the 100 level this week.

It fell to a low of 99.38 but recovered slightly to close at 99.67.

The European Central Bank is on track to get inflation back to its 2% target, but new challenges, including around a global trade war, may push up prices further out, so the bank should stop easing policy, ECB board member Isabel Schnabel repeated yesterday.

"Disinflation is on track, but new shocks are posing new challenges," Schnabel said on the social media platform X.. "Tariffs may be disinflationary in the short run but pose upside risks over the medium term. Therefore, we should keep a steady hand."

Once a leader in the European economy, Germany has now faced two years of recession, with inflation, high energy prices, and falling exports weighing heavily on businesses.

Key German economic advisers have downgraded their growth forecast for 2025 to zero from the previous projection of 0.4% in a report released Wednesday.

The report by the German Council of Economic Experts has reflected the ongoing struggles of the country's economy, which has been battered by two consecutive years of recession.

The report highlights that the German economy remains in a prolonged period of weakness. Bureaucratic hurdles and lengthy approval processes are slowing overall economic growth, while structural changes are accelerating, affecting sectors and regions that have thus far been economically strong.

The report also notes that U.S. President Donald Trump's trade policy is posing a risk to global economic growth. However, the Council underlines that the financial package introduced by the newly formed German government presents opportunities for infrastructure modernisation and a potential return to higher growth rates.

"Soon, the German economy will be significantly influenced by two factors: U.S. trade policy and the financial package," said Monika Schnitzer, chairwoman of the Council of Economic Experts.

From 2026 onwards, the report forecasts that funds from the German government's financial package will boost investment in construction, equipment, and government consumption. Meanwhile, private consumption is expected to grow slightly faster than in 2025, driven by stronger growth in price-adjusted disposable incomes.

The Council's downward revision of the growth forecast follows the German government's reduction of its 2025 forecast to zero growth in April. For 2026, both the government and the council are predicting 1% growth.

French President Emmanuel Macron is celebrating a record-high wave of foreign investment in France.

Macron will seal investment deals for €20 billion as he gathers CEOs from all over the world at the Versailles Palace for the annual "Choose France" kermesse, according to the president's office. His office also confirmed €20.8 billion of investments in the artificial intelligence sector, which are part of the €109 billion investment package Macron promised at the Paris AI summit earlier this year.

The euro saw some strength yesterday against a weakening dollar, although it appears to be close to the top of its recent range. It reached a high of 1.1355 and closed at that level.

Have a great day!