Consumer Prices (Sep.)

With CPI inflation just 0.5% in September and new COVID-19 restrictions darkening the economic outlook again, it’s hard to think of reasons why the Bank of England won’t launch another £100bn or so of quantitative easing at the policy meeting on 5th November.
Paul Dales Chief UK Economist
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UK Economics Weekly

Pay growth less inflationary than it looks, England v Scotland

The recent jump in pay growth has mainly been driven by base and compositional effects and is therefore less inflationary than it appears at first glance. That’s one reason why we think inflation will fall back below 2.0% next year and why the MPC won’t raise interest rates until 2025. Meanwhile, if economic variables are anything to go by, England may win tonight’s Euro 2020 clash with Scotland 2:1.

18 June 2021

UK Data Response

Retail Sales (May)

Rather than suggest the economic recovery is already spluttering, the decline in retail sales in May is probably just a result of the reopening of indoor hospitality in mid-May prompting households to spend less time shopping and more time socialising.

18 June 2021

MPC Watch

No tightening until 2024, and then by unwinding QE first

Even though the Monetary Policy Committee (MPC) will probably acknowledge in the policy announcement on Thursday 24th June that activity and inflation have been stronger than it expected, we don’t think it will suggest it is any closer to tightening policy. While the markets expect that policy will be tightened in late 2022, we don’t think the MPC will get to that stage until 2024. And when it does, we suspect it will unwind some quantitative easing before raising interest rates in 2025.

17 June 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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