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Speaking to CNBC, Barkin said, “So we’re happy to see inflation start to move down [..] I’d like to see a period of sustained inflation under control, and until we do that I think we’re just going to have to continue to move rates into restrictive territory.”

According to the Bureau of Labor Statistics, headline consumer prices were flat in July while producer prices were down 0.5%.

However, this figure is just one month’s data, with CPI still up 8.5% on a year-over-year basis and the producer price index climbing 9.8%. Each of these figures is still notably over the Federal Reserve’s target of 2%, meaning the central bank must continue to push forward in order to meet this goal.

“You’d like to see inflation running at our target, which is 2% at the PCE, and I’d like to see it running at our target for a period of time,” Barkin commented.

Official figures by the Office for National Statistics (ONS) show that GDP dropped 0.1% during the three months to the end of June, a significant step down from the first quarter of the year when GDP increased by 0.8%. In June, GDP was down 0.6%. 

The ONS reported that the country’s service sector was hit particularly hard, falling 0.4% over the quarter. 

In a comment, ONS director of economic statistics Darren Morgan said, “With May’s growth revised down a little and June showing a notable fall, overall the economy shrank slightly in the second quarter.”

“Health was the biggest reason the economy contracted as both the test and trace and vaccine programmes were wound down, while many retailers also had a tough quarter.

“These were partially offset by growth in hotels, bars, hairdressers and outdoor events across the quarter, partly as a result of people celebrating the Platinum Jubilee.”

The Bank of England has warned that the UK may enter into a recession later in 2022 and believes this could be the longest economic downturn since the financial crisis of 2008.

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The 50 basis points increase to 1.75% will be the largest interest rate in 27 years and will speed up a historic tightening of monetary policy to tackle the highest level of inflation experienced in four decades. 

In June, inflation reached 9.4%, with the BoE predicting it will rise again to 11% before the year ends. 

In a comment, BoE governor Andrew Bailey said, “The Committee will be particularly alert to indications of more persistent inflationary pressures, and will, if necessary, act forcefully in response. Bringing inflation back down to the 2% target sustainably is our job, no ifs or buts.”

The BoE has already raised interest rates on five occasions in the past seven months a record amount that is putting substantial pressure on people who have borrowed funds.

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Inflation is rising at its fastest rate in 40 years, and this has led to interest rates hitting their highest level in 13 years at 1.25 per cent – as of July 2022. It is widely understood that the increase in money supply during lockdown coupled with skyrocketing energy and fuel prices have been the main contributors to the current levels of inflation. Both of these factors have hurt business growth this year. Below, we explore how these factors affect businesses. 

Interest rates

Interest rates refer to the amount a borrower is charged for borrowing a sum of money. When they rise, businesses will find it difficult. Consumers will have to pay more money on their debt in these situations, which usually leads to them having less disposable income. As a result, your business might find it harder to sell your products or services – especially if you deal in luxury goods. Naturally, if interest rates fall, businesses will discover that customers can spend more. The other issue with rising interest rates is that they make it harder for businesses to acquire loans, which in turn impacts how much they might invest in new ideas and projects. It’ll make any loan you take out more expensive and it’ll typically take longer to pay back, which in turn makes individuals and organisations think twice about their long-term outlook.

Inflation

Inflation can also impact businesses negatively. It refers to the rise in the cost of goods: if inflation occurs slowly, it can be good for business as it encourages consumers to spend in the present. However, sharp inflation can hurt businesses. When inflation soars, the cost of living rises, and employees will ask for higher wages to help them afford essentials. As such, businesses will have to pay higher salaries. But it also affects supply chains too. Businesses will have to pay more for the raw goods needed to make their products or carry out their services. When all of these impacts are combined, businesses will find that they’re spending significantly more money each month.

What steps are businesses taking to cut costs?

When interest rates and inflation rise, businesses usually have to take steps to cut costs. For instance, if a business is interested in purchasing a fleet of vehicles, it’ll look through car lease deals rather than making outright purchases. However, if more dramatic cuts are needed, a business might make the unenviable decision to lay off some of its workforce. This decision can damage the reputation of a company and limit future growth as the business downscales. It’s a tough decision that’s usually made when other, less drastic, cuts have been made without success. 

Rising interest rates can create a difficult financial period to navigate. Consumers will find it hard to make ends meet each month, while businesses will see their revenue fall. But by taking sensible steps to cut costs and find innovative ways to increase revenue, your business can survive and thrive in the future.

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The introduction of such a measure would see millions of households paying a fifth less in income tax, with those on the average UK salary of £32,000 saving approximately £777 per year. Sunak said this would be the “largest cut to income tax in 30 years” and called the move “responsible.”

The former chancellor said the commitment would be delivered by the end of the next parliament if he wins the Conservative leadership race.

Speaking to BBC Radio 4’s Today programme, Sunak said, Now the last week or so of this contest we’ve been focused on the here and now about how best to fight inflation and I think everyone knows where we stand on that and we have different points of view.”

“But, as chancellor, I was very keen to make sure that I started cutting taxes and what I’ve announced today builds on that and that’s because I believe in rewarding work and the best way for the government to signal that is to cut people’s income tax.”

"And in this parliament as chancellor, I already said we’re going to cut income tax for the first time in almost 15 years and, as prime minister, I want to go further than that and cut income tax at the basic rate by a fifth to 16p, but I want to do that in a way that’s responsible.”

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The news comes not long after the Federal Reserve upped interest rates by three-quarters of a percentage point to a range of 2.25%-2.50% in a bid to curb growth and ease price pressures.

Despite the report, Federal Reserve Chair Jerome Powell thus far maintains the view that an economy that is adding hundreds of thousands of jobs per month is not experiencing a recession. Over the past months, Powell has vowed to take action against record-high inflation

"We do want to see demand running below potential for a sustained period to create slack and give inflation a chance to come down," Powell commented on Wednesday. 

"It's also worth noting that these rate hikes have been large and they've come quickly, and it’s likely that their full effect has not been felt by the economy. So there’s probably some additional tightening - significant additional tightening in the pipeline."

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What has happened?

The euro has fallen to the same value as the US Dollar, with 1 EUR being worth exactly 1 USD, according to many forex traders who have been keeping a close eye on the marketThis is big news as this is the first time their values have been equal in 20 years.

Why has the euro lost value?

One of the main reasons that the euro has lost its value is the conflict in Ukraine. Russia, which invaded Ukraine at the end of February, is one of the main suppliers of gas to Europe. However, it’s thought that Russia will retaliate against western sanctions by completely cutting off the gas supply to Europe. 

This uncertainty amid rumours that the 10-day scheduled shutdown of the Nord Stream 1 could be made permanent has contributed to the energy crisis in the UK

What does this mean for Europe?

Unfortunately for us in Europe, it’s not good news. With many countries already on the cusp of a recession, the euro losing its value isn’t going to help the situation. The fall of the euro confirms the fact that current political situations and the energy crisis are going to have a knock-on effect on our bank accounts. 

What does this mean for the pound?

Unfortunately, the pound is also unable to escape the dip in the European economy. So far, the pound has reached its lowest rate since March 2020, when the pandemic hit. 

In practical terms, this means that imports such as food will become more expensive, pushing our monthly food bills upwards. We’ll also see an increase in commodities such as petrol. For those going abroad on holiday this summer, it’s not good news either. With a weaker pound, families will get less for their money when buying abroad. 

What to expect next?

Although it may seem like a lot of doom and gloom, we haven’t entered into a recession yet. So, there’s always the potential that the times of hardship will pass, and the currency values will climb back up to their levels before conflict breaks out in Europe. 

However, on the other end of the scale, there is also the possibility that the pound and euro will continue to fall, leading to a full-blown recessionOn the other hand, the dollar has remained strong throughout, so it’s clear that the recession is just Europe-wide. 

What will happen for certain? Only time will tell.

Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.

Netflix

It’s fair to say that the fortunes of Netflix have taken a turn for the worse over the past few months; from reaching highs just shy of $700 at the end of 2021, Netflix is now trading below $200. 

The sharp falls in trading price have followed two most recent poor earnings reports and disappointing guidance from senior executives. For now, the Netflix share price is consolidating in a range between $162 to $205.

However, a glimmer of hope emerged in the closing week of the 15th; Netflix stock achieved its best performance since January this year, rallying a little over 8% and closing at highs. 

The most recent problems for Netflix seemed to arrive all at once. Concerns over peak subscriber growth in developed markets, increased competition from a growing number of streaming rivals, and a more discerning consumer feeling from the inflation pinch all adding to existing woes. 

On the first quarter drawdown, billionaire Bill Ackman (Pershing) loaded up on Netflix stock, however, after earnings disappointed in the following quarter, Ackman bailed on the position and stated that "..in light of recent events, we have lost confidence in our ability to predict the company's future prospects with a sufficient degree of certainty." 

Ackman’s Pershing realised a $400 million loss in the process, and the point stands that Netflix is undergoing a fundamental transformation. One of the major changes is the push for an ad-supported tier to drive an uptick in subscription rate, and markets will certainly be anticipating further details within Tuesday’s earnings report. 

The streaming giant has also recently announced a partnership with Microsoft as their global advertising technology partner. On the surface, this is a win-win proposition. Netflix gains expertise and tech support from Microsoft, while Microsoft gains exclusive advertising access to the Netflix audience, which could boost their offering in the advertising industry in an attempt to close the gap between giants still leading the way, such as Google.  

There is plenty to focus on following the most recent Netflix earnings report. Netflix had previously forecast the loss of a further two million subscribers in the second quarter of this year. Will this turn out to be the case, and are further subscriber losses likely to be expected?

Just how big the FX hit may be also remains to be seen. Netflix’s steadfast refusal to hedge its FX exposure has cost them over the years. The recent strength of the USD could mean these costs climb to new highs. 

So, there remain plenty of questions as Netflix embarks on a new business trajectory. Will introducing an ad-supported tier signal the start of a necessary transition? Or do tougher challenges await?

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The ONS put June’s inflation figure partly down to a 42% year-on-year increase in petrol prices.

Last month, average petrol prices stood at 184p a litre, up 18.1p since May alone. Diesel, meanwhile, increased by 12.7p to 192.4p a litre.

Food and non-alcoholic drinks were up 9.8% in the year to June, the highest rate since March 2009. 

Grant Fitzner, chief economist at the Office for National Statistics (ONS), commented: “Annual inflation again rose to stand at its highest rate for over 40 years.”

“The increase was driven by rising fuel and food prices, these were only slightly offset by falling second-hand car prices.”

“The cost of both raw materials and goods leaving factories continued to rise, driven by higher metal and food prices respectively.”

“These increases saw raw materials post their highest annual increase on record, with manufactured goods at a 45-year high.”

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Compared to one year ago, the CPI hit 9.1% in June, jumping from the 8.6% year-on-year rise seen the month before. The increase maintains the highest inflation seen in four decades for the US economy.

Wall Street analysts had predicted a month-on-month increase of 1.1% and an annual increase of 8.8%.

June’s rise was heavily influenced by higher fuel and food costs. The price of petrol increased 11.2% from May while energy prices rose 60% over the past year. Food prices were up 1% from May and 10.4% over the previous 12 months. 

Last month, Federal Reserve Chair Jerome Powell vowed that policymakers would not allow inflation to overcome the US economy in the long term:“The risk is that because of the multiplicity of shocks you start to transition to a higher inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening,” Powell said.

“We will not allow a transition from a low-inflation environment into a high-inflation environment.”

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A perfect storm of negative drivers is disrupting businesses nationwide. The lingering impacts of the pandemic and Brexit, the war in Ukraine, fuel shortages and rising energy prices, a scarcity of labour and rising inflation are among the seismic forces making life and business difficult.

To further understand and quantify the impact of these on the cost of doing business in the UK, Equals Money conducted a survey of 1,000 C-level UK business leaders. 

75% say that the tough current economic ecosystem makes it “challenging” to keep going and more than a quarter (28%) say that it’s “very challenging”, with 20% worried that their companies will fold. A whopping 97% expect to experience knock-on effects to their business due to the soaring cost-of-living for employees and consumers. The key takeaways for business from our research are:

Poor cash flow is troubling most businesses

Following years of disruption, 92% of UK businesses face cash flow struggles, with the top causes in today’s climate reported as:

Costs are rising universally

More than half (55%) said their costs have increased consistently over the past two years of the COVID-19 pandemic., As they continue to contend with several interplaying economic challenges, most businesses (65%) expect their costs to increase in 2022, while a quarter (24%) anticipate that their profits will fall.

The five cost areas business leaders report  to have increased the most since 2022 are:

  1. Insurance (59%)
  2.  Sales and marketing (58%)
  3. Technology (58%)
  4. Professional services (58%)
  5. Tax (57%)

The cost-of-living crisis is biting hard

Almost all business leaders (97%) expect the current cost-of-living crisis to create fresh challenges. The most significant of these is an anticipated reduction in consumer demand, which is listed as a major concern by 37% of decision-makers.

Around a third of firms expect further issues to spring from the cost-of-living crisis, including:

Brexit and coronavirus are casting a long shadow

Two in five (40%) business leaders report that both Brexit and coronavirus have increased their overall business costs.

Brexit has had the most significant impact on the price of raw materials (43%), imports and exports (42%) and manufacturing and production (42%).

Comparatively, the biggest cost increases following the pandemic are in imports and exports (42%), use of professional services such as accountants, lawyers and consultants (40%) and sales and marketing (39%).

Many business leaders are considering drastic action

Our study shows that nearly all respondents (91%) are taking significant action to mitigate risk, maintain competitiveness and protect their cash flow.

Within this group, two-thirds (65%) have either already pivoted their business (32%) or are currently considering doing so (33%). More than a quarter (27%) of leaders are currently looking to sell their business, while a further 17% have considered selling.

The results of the Equals Money survey are echoed by The British Chamber of Commerce’s recent research, which found firms across the country are under intense pressure from a variety of costs. It reported that three quarters (73%) of them are raising prices in response to the increasing outlay. 

How businesses can respond to financial pressure

There are a number of ways businesses can actively save money during these difficult times:

The challenges the pandemic posed and the resultant financial impacts, together with other events, have made it a tough period for UK businesses. We are not out of the woods yet, and all signs indicate things will worsen before they get better.

With costs set to increase across most key areas, it is even more important to use every tool available now for businesses to control and have visibility over their spending.

 About the author: Simon England is Managing Director at Equals Money.

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In June, Federal Reserve officials highlighted the need to tackle inflation, even if it came at the cost of slowing the economy amid the looming threat of recession. They said that the US central bank’s July meeting would likely see another 50 or 75 basis point move on top of a 75 basis point increase that was approved in June. 

“In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives,” the minutes read.

“In particular, participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting. Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognised the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”

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