Consumer Prices (May)

May’s further fall in inflation is probably only the beginnings of a prolonged period of very soft price pressure that we think will prompt the Bank of England to announce a total of £350bn more QE, starting with £100bn (or maybe even £150bn) at tomorrow’s policy meeting.
Paul Dales Chief UK Economist
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UK Data Response

Public Finances (Aug.)

August’s public finances figures provided further evidence that the government’s financial position isn’t as bad as the Office for Budget Responsibility (OBR) predicted back in March. But the rumours of the Chancellor’s stricter fiscal rules suggest that in the Budget on 27th October he is more likely to use any windfall to reduce borrowing at a faster pace rather than provide any extra support to the economy.

21 September 2021

UK Economics Weekly

Weak activity news likely to stave off rate hike

On the back of the surge in inflation in August and the blistering increases in wholesale gas and electricity prices, investors and some economists have shifted their expectations of the first rate hike into Q1 2022. But a rate rise anytime soon would probably prove counterproductive. Meanwhile, we continue to think that inflation fears will ease in time, as supply shortages wane. However, the big risk is that inflation expectations keep rising and that the MPC judges in 2022 that they are too big to ignore, whatever is happening to the real economy.  

17 September 2021

UK Economics Update

Inflation to fall sharply in 2022 despite higher utility prices

Given the recent surge in wholesale gas and electricity prices to record highs, it looks likely that Ofgem will opt for another chunky hike to the price cap on households’ utility bills next April. While this will hit household real incomes, it doesn’t change our view that inflation is set to drop back sharply next year.

17 September 2021

More from Paul Dales

UK Economics Chart Book

Inflation risks rising

The risks to our forecast that CPI inflation will rise from 1.5% in April to a peak of 2.6% in November before dropping back in 2022 are increasingly on the upside. Rises in shipping costs and global agricultural commodity prices as well as shortages of semiconductors and labour could all conspire to push CPI inflation higher this year and keep it above 2% next year. At the moment, though, we think that the lingering effects of last year’s collapse in output will prompt many firms to absorb the bulk of higher costs in their margins and to limit pay rather than pass them on to consumers via much higher prices. This “spare capacity” effect explains why we think core inflation will stay below 2% until late in 2023.

10 June 2021

UK Markets Outlook

Markets mistaken on when and how BoE will tighten

Our forecasts that the Bank of England won’t tighten monetary policy until much later than the markets expect and that when it does it will unwind some QE first (perhaps in 2024) before raising interest rates (perhaps in 2025) is consistent with the gilt yield curve steepening over the next couple of years. So while 2-year gilt yields will probably remain very low for a couple more years yet, 10-year yields may rise from 0.86% now to around 1.50% by the end of 2022. We suspect that the resulting drag on the future value of UK corporate earnings will be more than offset by the boost to earnings from a faster and fuller economic recovery than is widely expected. And given that the valuation of UK equities still appears attractive, there is scope for UK equities to rise more rapidly than equities in other major markets. Our forecast is that the FTSE 100 climbs from 7,000 now to around 8,250 by the end of 2022.

24 May 2021

UK Data Response

Retail Sales (Apr.)

The surge in retail sales volumes in April shows that households flooded back to the shops once they reopened in the middle of the month and suggests there is even some upside risk to our forecast that the economic recovery will be fast and full if households spend a big chunk of their lockdown savings.

21 May 2021
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