Client Update - 14th July 2023
Markets had a better time of it this week, mainly on the back of better than expected US inflation figures announced on Wednesday. Headline inflation fell from 4% in May to 3% in June, the lowest level since March 2021. Used car prices and food costs continued to fall, however higher housing costs remain. The figures underscore the relatively rapid progress the US has made in curbing price increases, especially compared to the UK, where inflation hit 8.7% in the year to May. Danny Blanchflower, a former member of the Bank of England's rate-setting committee who is now Professor of Economics at Dartmouth, said that the US economy was more nimble than the UK. He said the UK economy had been hit by Brexit, which has made it more difficult for firms to do things like switch supply chains to lower cost alternatives.
We appear to be finally at a crucial point in the US fight against inflation. After COVID, inflationary pressures surged after vast fiscal stimulus during the pandemic, which amounted to more than 25% of GDP and included three rounds of cheques sent directly to most households. The infusion of cash into the economy, which the Federal Reserve (FED) chose not to offset with higher interest rates, set off a consumer-spending boom that overwhelmed the world’s covid-strained supply chains, disrupting other economies. With too much cash chasing too few goods, inflation spiked. Then, after Russia invaded Ukraine, companies producing energy or food also found themselves selling into a shortage. Their prices and profits shot up and central banks realised too late that inflation was not just here to stay, it was rising fast.
Most importantly in the US data this week was the crucial core inflation figure (excluding food and energy) that was lower than expected. It rose by just 0.2% between May and June, the smallest increase since August 2021. Overall core inflation slowed to 4.8% in the year to June, down from 5.3% in the 12 months to May. Lower inflation should mean the FED won’t need to push through a second rate rise after the current pause, with the market still expecting a 0.25% rise on 28th July.
The only good news currently for the UK is the strength of the pound as UK interest rates are expected to stay higher for longer, heartening news if you are heading off for your summer holiday overseas. Eyes are already turning towards the next Bank of England statement in early August to see if there has been any meaningful reduction in UK inflation and how the Bank will respond.
Closer to home, news has started to focus on Cornish Lithium’s continued efforts to revive the South West’s mining sector with its continued exploration for Lithium. Exploration around the historic china clay mines in Cornwall has shown lithium in the granite underneath the clay. Geothermal water that flows through the rock contains the lithium that can be used as part of the chemical process to produce batteries for electric cars. There is also an option to extract lithium from mica – the sparkly mineral found in the granite rock.
Cornish Lithium and Imerys British Lithium are looking to secure financing to try and utilise as yet unproven technology to extract this lithium. Cornish Lithium hopes a £244 million project can generate 7,000 tonnes a year of Lithium Carbonate Equivalent (LCE) from as early as 2026. Interesting news, but still someway short of covering expected UK electric car needs of 80,000 tonnes a year. Current global extraction methods focus on evaporating brine in Chile, to crushed rock in Australia, that is exported to China to process a mineral called spodumene. This ore needs to be heated to 1,000C to generate the required output, and it is hoped that the ways being explored to mine Lithium in Cornwall can be less carbon intensive than this crushed rock method, which currently generates almost half of the worlds supply of Lithium. Chinese battery manufacturer CATL is also developing mica-based mining projects in Jianxiawo, underlining that this is a method of extraction that has potential.
Until this funding can be secured, it seems that lithium in Cornwall shares some similarities with the Bank of England’s Governor Andrew Bailey – both appear to be caught between a rock and hard place. Do have a good weekend.