Market wrap up – 5 September 2022

With the energy and cost of living crisis continuing to be a key political issue, European utilities have been asking for government support to help them finance more expensive gas purchases and the European Commission is working on structural reform to the power market in order to decouple the price of electricity from the price of gas.

In the UK the newly elected Prime Minister Liz Truss has proposed recently to help households through a VAT reduction in an emergency budget next month – with a 5 percentage point cut (costing £38bn and saving the average household £1,300) or a 10 percentage point cut (costing £60bn) currently being debated.

Critics argue that such VAT reductions are not targeted at helping the poorest households who need the most help and could actually stoke longer-term inflationary pressures.

Similarly in the US, President Biden’s proposals to address the student loan crisis and forgive some student debt similarly faces accusations of being regressive (in providing help to people who generally have higher earning power) and could actually result in proving to be more inflationary.

The recent decline in equity markets reflect the determination of US and European Central to constrain recent rises in inflation. Markets consider this policy to be a restraint on growth.

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