Lies, damn lies and statistics!

The ONS has admitted that the UK’s April inflation data was wrong

The Office for National Statistics (ONS) recently admitted that the UK’s April inflation data was wrong, as it spotted an error in vehicle excise duty data provided to it by the Department for Transport. The ONS has also had to suspend another key inflation measure – producer prices after discovering an error in the method of processing data.

However, it is not just the UK which has a problem with the accuracy of statistical data. Jerome Powell, Chair of the US Federal Reserve (Fed), has warned that ‘volatile and unreliable data could impair decision-making for the Fed’. This is because the integrity of US economic data is coming under increasing strain, with the Bureau of Labor Statistics (BLS) facing budget cuts, staff shortages and rising reliance on data estimates. This is because there has been a recruitment embargo since President Trump took office, as part of his plan to reduce spending and materially downsize the numbers employed by the federal government.

Since 2024, US inflation data collection has been scaled back with the number of both cities and categories monitored reduced. For example, toy dolls have been removed from coverage, yet these could be a key measure of tariff cost pass-through as these are mostly imported from China!

The proportion of data which is estimated has also increased materially to almost a third. Estimating data is relatively straight-forward for many sectors such as food with the price of fruit in Atlanta likely to be similar to that in Nashville. However, during periods of economic volatility such as with Trump’s trade tariffs, estimating may not prove so reliable.  The method of surveying consumers has also shifted from face-to-face to online which has introduced sampling bias, under-representing older, rural and lower-income populations.

Little wonder that the Fed is warning about data reliability given trade tariff uncertainty, while consumer behaviour is changing and economic growth signals are weakening. Whilst the cuts are expected to have a ‘minimal impact’, if the BLS cannot provide accurate data for tariff-sensitive categories such as consumer goods, clothing or electronics then official inflation data risks being distorted. This could lead to an underestimation of price pressures, delayed policy action or even mis-aligned interest rate decisions by the Fed.

Given the sensitivity of global equity and bond markets as well as currencies to inflation data, we must hope that the statistics are reliable. A 0.1% difference may not seem a lot but can create huge shifts in investor sentiment.

What have we been watching?

While global bond markets saw renewed jitters over fiscal stability, equity markets remained in optimistic mood despite the uncertainty from Trump’s latest tariff announcements. For example, US, German and the top 100 UK companies all touched record new highs. US equities were boosted by AI-chip maker Nvidia, which is up over 20% so far this year and has become the first company to hit a $4trillion market capitalisation. 

Copper, traditionally seen as a global economic barometer, also hit an all-time high, but this was due to a Trump tariff of 50% being announced. The UK was pushed higher by global mining companies. Over the weekend, Trump announced Canada, the EU and Mexico would face tariffs of 30% or more from 1st August. Markets are hoping that this is a Trump negotiating tactic and that diplomacy wins out.

Last week started with Trump announcing 25% tariff rates against Japan and South Korea from August 1st. This was then followed by ‘trade letters’ to a further twelve countries including South Africa (30%), Malaysia (25%), and Indonesia (32%). Trump also said that ‘any goods transhipped to evade a higher tariff, will be subject to that higher tariff’ possibly targeting China which is believed to have been transhipping through countries like Vietnam. These ‘transhipping tariffs’ would be separate from sector tariffs such as steel. The headline tariff rates for most other countries remained around the levels announced on Liberation Day. However, Trump warned that any country that raises their tariff in response, would see a further 25% tariff hike on top of that from the US.

As the week progressed Trump appeared to adopt an even harsher tone on tariffs. He said that ‘No extensions will be granted’ to the August 1st deadline on the reciprocal tariffs. Having also suggested that a trade deal with India was close, he continued to take a hard line over members of BRICS countries, saying the group was ‘set up to hurt us and I can play that game too so anybody that’s in BRICS is getting a 10% tariff addition.’

He then went further by imposing a 50% tariff upon Brazil, which is significant as it broke with the trend of tariffs being broadly in line those announced on Liberation Day. Trump also extended his sector tariffs with a 50% charge on copper products from August 1st while some drugs could see tariffs of up to 200% but these could be delayed for 12-18 months. Over the weekend, Trump threatened Canada with 35% tariffs and a higher baseline tariff of 15%-20%, up from 10%. The EU and Mexico were threatened with tariffs of 30% or more from August 1st.          

Besides tariffs, investor attention focused upon the latest minutes from the US Federal Reserve (Fed), which showed a growing divergence in interest rate expectations, where 10 of 19 officials pencilled in at least two rate cuts this year while a further 7 saw no cuts and the other 2 policymakers saw one cut. Looking ahead, the next Fed meeting is at the end of this month, just before Trump’s August 1st tariffs. Fed members will no doubt want to see the impact of tariffs on US inflation. Meanwhile, US jobs data continues to be better than expected.

Fiscal stability concerns saw government bond yields edge higher. The sell-off initially began in Japan but, saw the US 30-year Treasury yield climb back towards 5%.

 

In Europe, France’s 30-year bond yield reached its highest level since the Euro crisis turmoil of 2011 while Germany’s 30-year moved up to within a whisker of its late-2023 peak.

 

The UK 30 -year gilt yield moved back up to 5.45%. The UK was not helped by the publication of the OBR’s ‘Fiscal Risks and Sustainability’ report which concluded that demographic pressures would help push debt-to GDP above 270% by 2070 based on current government policy. Admittedly, the challenge of an ageing population is not the UK’s alone, but the report does highlight that financing problem is not going away for many governments. The UK economy also contracted unexpectedly in May by -0.1% which should further cement an August interest rate cut by the Bank of England.      

Read our latest investment insights from Alpha PM

 

Brent oil edged above $70 as the EIA lowered its US oil production forecast.      

Finally, we recently covered the UK’s expensive electricity prices in Alpha-Bites Going Nuclear. We therefore read with interest the following comment from a fund manager specialising in global uranium investments. ‘China continues its aggressive nuclear reactor build out. The estimated total cost of building these latest ten reactors was roughly 1/6th the cost of those in developed markets, such as Hinkley Point C.’  Very difficult to compete with that!

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