The Inflation Spectre Cometh
ONLY TEMPORARY RELIEF ON UK INFLATION
The coming week’s UK data calendar is busy. Possibly of most interest will be in the latest inflation numbers. In the space of four months, the annual rate of CPI inflation has picked up from just 0.4% in February to 2.5% in June and is set to move higher still over the coming months.
EXPECT 4%
The Bank of England’s recent update contained an eye-catching upward revision, with headline CPI now projected to move up to around 4% in Q4. We expect, however, that it will have moderated in July. The extraordinary trading conditions in 2020 saw businesses slash prices earlier than normal, meaning that the usual July discounting in clothing and footwear and furniture stores was unusually small. Now, the British Retail Consortium (BRC) Shop Price Index data is pointing to a return to more normal seasonal price reductions this year. That should weigh on annual comparisons and we look for annual headline CPI inflation to drop back to 2.1% in July from 2.5%. That means the recent very sizeable gap between US and UK inflation may briefly move even wider before probably shrinking sharply in the second half of 2021. Beyond the July print, UK inflation is expected to resume its upward move. Notably, base effects associated with last year’s temporary reduction in VAT for parts of the hospitality sector along with the government’s Eat Out to Help Out scheme are expected to see annual inflation rebound sharply in August (report published on 15th September). With ongoing supply chain issues, and higher energy prices set to add further upward impetus in the months ahead, inflationary pressures look likely to remain acute going into year end. Of most interest amongst other UK releases will be updates on the labour market and on the consumer.
RISING WAGES The expected outlook for the labour market has changed sharply of late. The end to the furlough scheme is no longer expected to lead to a big rise in unemployment. Instead the focus is now on businesses reports of difficulties in filling vacancies and of the resulting upward pressure on wages. Tuesday’s labour market report primarily covers the three months to June. We expect it to show a further rise in employment but that the unemployment rate will be unchanged from last time at 4.8%. However, the level of unfilled vacancies may rise again highlighting recruitment difficulties and a big question is whether these are temporary mismatches that will dissipate as economic conditions normalise?
Wages are forecast to have risen sharply but that probably will be mostly due to pandemic induced data distortions and so says little about underlying conditions. The retail sales report for July may show a modest monthly fall in spending. Certainly, footfall data suggests that consumers’ initial reaction to the reopening of retail establishments has been fairly cautious. The BRC has suggested that July sales may have been hurt by w et and generally disappointing weather and by consumers switching spending away from goods and into services as restrictions have been lifted. Analysts also forecast a modest fall in consumer confidence, in line with the recent slip in business sentiment.. However, confidence will still be well above pandemic lows.
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