Consumer Prices (Jun.)

The rise in CPI inflation from 2.1% in May to 2.5% in June was smaller than the leap in US inflation to 5.4% released yesterday, but we think the gap between the two will shrink as inflation in the UK climbs to around 4.0% by the end of the year. That said, as we suspect that the spike in UK inflation will be short-lived, we don’t expect the Bank of England to tighten policy anytime soon.
Paul Dales Chief UK Economist
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UK Economics Update

Labour shortages to push up wages for a bit longer

The latest data suggest that the upward pressure on wage growth from labour shortages has a bit further to run. Admittedly, the discovery of the Omicron variant has clouded the near-term outlook for wages and the labour market, with higher virus infections and/or tighter restrictions once again a possibility. Nonetheless, our base case is that most of the upward pressure on wage growth will subside from mid-2022, underpinning our view that Bank Rate won’t need to rise as far as investors currently expect.

30 November 2021

UK Economics Update

Omicron – The risks to GDP and for the BoE

The restrictions announced by the government on Saturday in response to the new Omicron COVID-19 variant increase the downside risks to our GDP forecasts and the chances that the Bank of England delays increasing interest rates until next year. And although the worse-case scenario of another lockdown in January could reduce GDP by something in the region of 3.0% m/m, the one morsel of comfort is that the economy has become more resilient to lockdowns.

29 November 2021

UK Data Response

Money & Credit (Oct.)

The rise in consumer credit in October adds to evidence that economic activity fared well at the start of Q4. But that no longer offers much comfort in light of the discovery of the new Omicron variant. While much remains uncertain, the risks to our (already subdued) GDP forecast appear to the downside.

29 November 2021

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UK Economics Weekly

No need to fear as furlough enters final furlong

We think that concerns about the winding up of the furlough scheme are overdone for two reasons. First, at the end of May only 2.3m people were on furlough and half of them were working at least some hours. Second, by the time the scheme closes at the end of September, we think GDP will have risen back to its pre-pandemic peak. That means the economy can support a level of employment similar to the current level. As such, the furlough will probably go down in history as the scheme that averted a bloodbath in the labour market.

2 July 2021

UK Economics Weekly

Inflation fears, Euro 2020 hopes

The mounting evidence that price pressures are rising is a threat to our forecast that CPI inflation won’t spend a long time above the 2% target until late in 2023. The good news, though, is that if inflation were more important than goals in the Euro 2020 football tournament, then at least one of England or Scotland would make it into the knockout stages.

11 June 2021

UK Economics Weekly

BoE to unwind QE before it raises interest rates

The rapid rebound in economic activity revealed by this week’s data releases has started to prompt some questions about when and how the Bank of England will tighten monetary policy. Our answers are not until 2024, which is later than the tightening in late 2022 the markets have assumed, and by unwinding some quantitative easing first before raising interest rates. Both of those are consistent with the gilt yield curve steepening.

21 May 2021
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