Hello again. As expected, there were no major fireworks from the US Federal Reserve today.

The Fed has voted to leave interest rates at their current record lows. It’s also released new forecasts which show it expects to leave borrowing costs unchanged, near zero, through until 2024.

That’s a very dovish signal that policymakers expect to maintain very loose monetary policy for many, many, months to come.

The Fed has also raised its estimates for 2020 GDP and lowered its forecast for unemployment to 7.6%, due to the pick-up in growth over the summer.

Here’s some early reaction:

Time for a recap....

• Inflation across the UK has fallen to its lowest level since the end of 2015, due to cheaper clothing and airfares...and the government’s discount meal deal.
  
  
• The Consumer Prices Index fell to just 0.2% in August, from 1% in July, with the cost of living pulled down by the Eat Out To Help Out scheme. Prices at hotels and restaurants slumped by 2.8% per year, the first negative reading on record.
  
  
• Economists predicted that inflation would remain low, pegged down by weak demand and rising unemployment. Saxo Bank warned that ‘deflationary pressures’ are building.
  
  
• Scotland’s economy shrank by over 19% in April-June, new figures show, slightly less severe than the UK-wide slump.
  
  
• The OECD struck a slightly more positive note, saying that the world economy would contract by less than feared this year.
  
  
• It also urged governments not to make the mistake of raising taxes or slashing spending to tackle rising deficits, as such a move would be counted-productive (and unnecessary, with borrowing costs so low).
  
  
• The UK government has extended a ban on evicting commercial tenants who don’t pay their rent - a boost for small businesses, but a blow to landlords....
  
  
• In the US, retail sales growth has slowed, in a sign that the economic recovery could be losing its early zip.
  
  
• Boeing has been accused of gambling with public safety by cutting costs during development of its 737 Max jet, which was grounded after two fatal crashes

• Stock markets are mixed, as investors await the latest forecasts from the Federal Reserve at 7pm BST tonight. The FTSE 100 has dropped by 0.5%, as a stronger pound hits multinationals, while the US Dow Jones industrial average is up 0.3%.

I’ll be back later to cover the Fed announcement, although it’s not expected to be too dramatic....

The US stock market has opened at little higher, as investors take a cautious position ahead of the Federal Reserve meeting tonight.

The Dow Jones industrial average has risen by 50 points to 28,045, while the tech-focused Nasdaq is 0.4% higher.

Any anxiety over the slowdown in US retail sales may have been countered by the encouraging Covid-19 trial results from Eli Lilly.

Newsflash: The UK government has extended its support to protect struggling businesses from being evicted from their premises.

With Covid-19 still hurting many firms, the government has decided that commercial tenants, such as restaurateurs and retailers, should be protected from being evicted from their premises by landlords until the end of the year, even if they can’t meet their rental payments.

The move will give commercial tenants greater security and protecting vital jobs, Communities Secretary Robert Jenrick says.

I am announcing today that we are extending support to protect those businesses that are unable to pay their rent from eviction to the end of the year. This will stop businesses going under and protect jobs over the coming months.

This government is committed to supporting businesses and our high streets at this difficult time, and this extension of support will help businesses recover from the impacts of the pandemic and plan for the future.

The latest US retail spending figures are out....and they’re weaker than expected.

US retail sales rose by 0.6% in August, shy of predictions for a 1.0% jump. July’s sales figures have been revised down to, from 1.2% to 0.9%.

Encouragingly, this is the fourth month of retail sales growth in a row. But it does suggest that the immediate surge in demand as the lockdown eased has faded. That’s understandable, but it also suggests the recovery may be slowing.

Such a slowdown would worry policymakers, and could spur them into further stimulus efforts.

Deflationary forces are intensifying in the UK, following the slump in inflation last month to a near five-year low, warns Christopher Dembik, Head of Macro Analysis at Saxo Bank.

He says it’s a serious worry, given the problems building across the UK economy:

The direct consequence of low-flation is that it adds pressure for the Bank of England to widen its support to the economy as the risks of hard Brexit or thin deal (which is currently our best-case scenario) are looming.

In July, the official UK CPI figures surprised on the upside with the biggest driver being a strong rise in fuel prices (petrol and diesel) following a significant increase in demand as the UK and many other countries began to reopen their economies. In August, the UK CPI is down again, confirming that deflationary forces are intensifying in most countries in the wake of the pandemic. The CPI is down to 0.2%, which is the lowest level since the end of 2015, from 1% in the previous month, while core inflation is also down to 0.9% from 1.8% in July. The Eat Out to Help Out scheme implemented by the government to incentivize customers to eat in restaurants and other eating establishments by pushing down the cost of dining out remains the most important deflationary driver (it reduced the CPI by 0.5% on its own) along with airfares that felt for the first time on record in August.

Dembik also predicts that a sharp surge in unemployment will keep prices low, as some families simply won’t be able to afford as much:

In the short-term, inflation will likely stay subdued as the pandemic scars remain. Rising unemployment, which will probably increase much further in coming months as the furlough is coming to an end in October, will push households to cut their spending, thus putting increased downward pressure on prices. The lowest point for inflation in COVID-19 times has certainly been reached, but we are not getting out from prolonged low-flation anytime soon.

Over in Scotland, new economic data shows its economy shrank by nearly a fifth in the last quarter, our Scotland editor Severin Carrell reports.

Scotland’s economy contracted by 19.4% in the second quarter of 2020 and by more than 21% over the first six months of the year, excluding North Sea oil and gas output, the country’s chief statistician has disclosed.

Roger Halliday found that during the first three months of lockdown, April to June 2020, the construction sector contracted by 41.5%, distribution, hotels and catering by 33.9%, production by 15.7% and the service sector by 18.7%.

Here’s the details: Gross domestic product - first estimate: 2020 quarter 2

The overall UK economy shrank by 20.4% during the second quarter, the worst in the G7.

In April, Scotland’s chief economist, Gary Gillespie, predicted that output could fall by as much as 33% due to the coronavirus pandemic and lockdown. Since then the Treasury’s easing programmes, and the Scottish government’s subsidies for many sectors, have led to less alarming data and forecasts.

The Scottish Fiscal Commission, the statutory body which reviews Scottish government economic and fiscal policy, said earlier this month the economy was recovering more quickly than had been feared [which echoes the OECD’s new forecasts].

It said that assuming the economy recovered at an average monthly growth rate of 2.3% “we could expect GDP growth for 2020 as a whole of -11.7%”.

“While this is a large fall, it is significantly less than if the near 25% contraction in GDP between January and April were sustained over the course of the year.”

Even so, the SFC said it may take until 2023 for the economy to recover to pre-pandemic levels. “We expect some permanent damage to the Scottish economy, with the effects still felt in the years ahead,” it said.

“Our illustrative projection of Scotland’s potential output suggests Scottish GDP might be around 4.0% lower in 2025 than it would have been without Covid-19. Significant downside risks to the economy remain if stricter lockdowns have to be re-implemented.

Economic growth will be contingent to the trajectory of bringing the virus under control and is therefore difficult to predict with any certainty at this point.”

The OECD is also urging governments to resist hiking taxes or cutting spending to address the huge borrowing run up during the pandemic.

My colleague Phillip Inman explains:

Governments must resist imposing spending cuts and hefty tax rises before their economies have recovered from the effects of coronavirus lockdowns, a leading global thinktank has warned.

In its quarterly health check of the global economy, the Organisation for Economic Co-operation and Development (OECD) said it would be necessary to continue borrowing extra funds into next year to support the worst-hit households and businesses despite concerns about mounting public sector debts.

In a clear shot across the bows of governments contemplating tax rises, including the UK, the OECD said public spending was needed to support a rebound in growth that had begun to slow in many countries since June, mainly on fears of further lockdowns this winter.

Here’s the full story:

Newsflash: The global economy is recovering faster from the Covid-19 pandemic than feared, according to the Organisation for Economic Co-operation and Development.

The Paris-based group has hiked its economic forecasts, noting that China and the United States are in better shape than it thought three months ago.

The global economy is now expected to shrink by 4.5% this year -- still a very serious slump, but not as bad as the 6% decline forecast in June.

The OECD says:

The drop in global output in 2020 is smaller than expected, though still unprecedented in recent history....

Output picked up swiftly following the easing of confinement measures and the initial re-opening of businesses, but the pace of the global recovery has lost some momentum over the summer months

It expects the world economy to strengthen in 2021, growing by around 5% - although this outlook is “exceptionally uncertain” while Covid-19 is spreading around the globe.

The OECD also predicts wild divergences across the global economy this year. China is expected to grow by 1.8%, while the US economy is set to contract by 3.8%. The eurozone is forecast to shrink by 7.9%, while the UK economy faces a 10.1% contraction.

The BBC’s Faisal Islam writes that the slide in inflation was due to the “extraordinary action taken to try to get Brits back into town centres”.

The fall to 0.2% is overwhelmingly the result of the impact of Eat Out to Help Out and the temporary VAT cut for the hospitality sector.

It is a statistic that reaffirms what we already know, but also reflects some freakishly temporary factors. The chancellor’s restaurant subsidy scheme is already over, the VAT cuts expire in January.

Inflation is likely to remain lower than its 2% target, except in the case of a further sharp fall in the value of the pound - for example, after a disorderly end to the post-Brexit trade talks. Either way, the Bank of England has more space for extra support to the economy in the coming months, without risking a surge in inflation.

The drop in UK inflation puts more pressure on the Bank of England to stimulate the economy, says the Financial Times, which adds:

UK core inflation, which excludes energy, food, alcohol and tobacco, slowed to 0.9 per cent in August from 1.8 per cent in the previous month.

Prices in restaurants and hotels contracted 2.8 per cent in August, compared with the same month last year, the first annual contraction for the sector since the series began in 1989.

This reflects the effect of the government’s ‘Eat Out to Help Out’ scheme, which offered discounted meals in restaurants during August.

Reuters concurs, saying:

Discounts for more than 100 million meals were claimed last month through the government’s “Eat Out to Help Out” programme, which offered diners a state-funded price reduction of up to 10 pounds ($12.89).

While this prompted an unusually large fall in the rate of inflation, the effect of the coronavirus pandemic on the economy and a coming surge in unemployment look likely to keep consumer prices in check.

Bloomberg points out that air fares saw an unprecedented drop (as August is usually an expensive time to fly):

Prices at restaurants and cafes fell 5.5% from July and were down 2.6% from a year earlier. The decline reflected the fact that consumers paid a subsidized rate during the month, with the government making up the rest.

There was also downward pressure from air fares, which posted the first decline for the month on record after coronavirus restrictions brought international travel to a standstill. Prices fell 1%, compared with a 22.4% increase a year earlier, with the drop driven by European routes, the ONS said.

Tom Stevenson, investment director at Fidelity International, says the UK is facing ‘disinflationary’ pressures - which go beyond one month’s cheap meal offers.

“Eat out to help out was the main influence on the lowest inflation rate for nearly five years. But disinflationary forces were evident across the economy as fears about an autumn surge in unemployment held back consumer confidence. Food, clothing and transport all exerted downward pressure on prices. It remains to be seen if this is part of continued downwards movement or just a monthly dip.

“Weak demand should ensure that inflationary concerns remain on the back burner for now and price growth will track closer to zero through to the end of the year. Rising coronavirus cases, the reintroduction of restrictions, negative wage growth and the prospect of half a million redundancies as the furlough scheme winds down this autumn will all play a part in keeping consumer spending subdued.

Other pressing issues, like a possible collapse in the Brexit talks and consequent pressure on sterling, will overshadow any inflation worries for now.”

The TUC says the UK economy is suffering from a lack of government stimulus:

Neil Birrell, chief investment officer at Premier Miton, points out that August’s inflation reading is actually a little higher than expected

“The inflation data in the UK surprised on the upside. The core year-on-year CPI was up 0.9% against expectations of 0.5%. Rising inflation has been much discussed as the inevitable consequence of all the stimulus being injected into the economy. Policy makers won’t be worried about this number, they are more likely to be pleased there is activity in the economy.”

Yael Selfin, chief economist at KPMG UK, predicts inflation will remain low for some time:

“The Eat Out to Help Out scheme and the cut to VAT for hospitality businesses helped push consumer inflation to just 0.2% in August, for the first time since December 2015.

“The low inflation will serve to protect households’ spending power at times when many are feeling under pressure.

“While we expect an initial bounce back in inflation in September, as the Eat Out to Help Out scheme comes to an end, overall inflation is likely to remain well below the Bank of England’s target for some time.”

This chart from today’s inflation report shows how Rishi Sunak’s discount meal scheme pulled inflation down last month.

And here’s the result - the lowest annual inflation rate in almost five years:

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Inflation across the UK has fallen sharply, as the government’s Eat Out to Help Out discount meal scheme drove down the cost of living.

Figures just released show consumer prices rose by just 0.2% year-on-year in August, with cheaper clothing and air fares also pulling the CPI down according to The Office for National Statistics.

That’s the lowest inflation rate since late 2015, and sharply down on July’s inflation rate of 1%.

The one hundred million meal deals paid for by the Treasury were the primary cause of this easing of the cost of living, as people flocked to restaurants, bars and cafes to save up to £10 per head.

The ONS says:

• Falling prices in restaurants and cafes, arising from the Eat Out to Help Out Scheme, resulted in the largest downward contribution (0.44 percentage points) to the change in the 12-month inflation rate between July and August 2020.
• Other smaller downward contributions came from falling air fares and clothing prices rising by less between July and August 2020 than between the same two months a year ago.
• The largest, partially offsetting, upward contributions came from games, toys and hobbies, accommodation services, road transport services and second-hand cars.

More details and reaction to follow...

Also coming up today

The US Federal Reserve releases its latest economic forecasts tonight, at the end of its latest monetary policy meeting (which began yesterday).

Fed chair Jerome Powell will also hold a press conference, where he’s likely to sound rather dovish. Last month he announced a new ‘average inflation targeting regime’ which would give him more leeway before tightening monetary policy.

Powell will also be keen to sound uncontroversial ahead of the US election in two months time, so investors should contain their excitement....

As Adam Cole of RBC Capital Markets puts it:

No policy changes are expected from the Fed and given Powell’s recent speech at Jackson Hole, there should be relatively little for the statement or press conference to add.

While acknowledging the more rapid improvement in the economic backdrop, we expect the message to remain one of caution.

The agenda

• 7am BST: UK inflation report for August
• 10am BST: Eurozone trade balance for July
• 1.30pm BST: US retail sales
• 3.30pm BST: US weekly oil inventory statistics
• 7pm BST: Federal Reserve interest rate decision
• 7.30pm BST: Fed chair Jerome Powell holds press conference