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UK Economics Weekly

Too soon to conclude inflation won’t become more persistent

It’s too soon to conclude that the weak tone of this week’s news on activity means that inflation won’t become more persistent. Our proprietary measure of underlying/persistent CPI inflation rose to a new record high in May. And the flurry of higher pay settlements across the economy suggests that high inflation is feeding into faster wage growth. This may not necessarily be enough to prompt the Bank of England to start raising interest rates in 50 basis point steps. But we still think that rates will need to rise from 1.25% to 3.00% to tame inflation.

24 June 2022

UK Data Response

Retail Sales (May)

The fall in retail sales in May suggests that the decline in households’ real incomes from surging inflation is starting to hit consumer spending a bit harder. Even so, consumer spending appears to be softening rather than sinking, so we doubt that this will deter the Bank of England from hiking interest rates further.

24 June 2022

UK Data Response

S&P Global/CIPS Flash PMIs (Jun.)

The fact that the composite PMI didn’t fall in June means the economy could be holding up a little better than we and the Bank of England had feared. Beneath the headline numbers, the survey also suggests strong inflationary pressures have not gone away. That supports our view that interest rates will rise from 1.25% now to 3.00% next year, further than the 2.00% peak expected by the consensus of analysts.

23 June 2022

Key Forecasts

Main Economic & Market Forecasts

Latest

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Q4 2023

2022

2023

2024

GDP (%q/q/y/y)

+0.8(+8.7)

-0.7%(+2.3%)

+0.4%(+1.8%)

+0.3%(+0.8%)

+0.4%(+0.5%)

+0.4%(+1.6%)

+0.5%(+1.7%)

+0.5%(+1.9%)

3.3

1.4

1.5

CPI Inflation (%)

(+9.1) May

9.1

9.6

10.3

9.2

5.3

3.9

1.8

8.8

5.0

1.6

Unemp Rate (%)

3.6 Apr.

3.6

3.7

3.8

3.8

4.0

4.0

4.0

3.7

4.0

4.4

Bank Rate* (%)

1.25

1.25

1.75

2.25

2.50

2.75

3.00

3.00

2.25

3.00

2.50

QE Stock* (£bn)

867

865

855

830

800

745

645

585

830

585

400

10-yr Gilt* (%)

2.27

2.27

2.73

3.00

2.94

2.88

2.81

2.75

3.00

2.75

2.25

$/£*

1.23

1.23

1.21

1.18

1.20

1.22

1.23

1.25

1.18

1.25

1.30

€/£*

1.17

1.17

1.17

1.18

1.17

1.16

1.15

1.14

1.18

1.14

1.13

Sources: Capital Economics, Refinitiv. * End period.


Too soon to conclude inflation won’t become more persistent

UK Economics Weekly

27 June 2022

Our view

Even though the UK economy is at risk of falling into a recession, the rise in CPI inflation to a 40-year high of 9.0% in April and other evidence that domestic price pressures are still strengthening support our view that the Bank of England will raise interest rates from 1.25% now to 3.00% next year. All this suggests that the prices of gilts and UK equities will fall further over the next year.

Latest Outlook

UK Economic Outlook

Rates to rise to 3.00% to rein in price expectations

Even though a further surge in CPI inflation to a 40-year high of 10% in October will take the economy to the brink of recession, we think the Bank of England will raise interest rates from 0.75% now to a peak of 3.00% in 2023 to contain domestic price pressures and stamp out the recent rises in price expectations that risk inflation getting get stuck above the 2% target. Our forecasts envisage inflation being higher, GDP growth being lower and interest rates rising further than investors and other analysts expect.

26 April 2022