Inflation expectations – what to watch

The inflation expectations of households, businesses and the financial markets will probably rise in the coming months as actual CPI inflation jumps to over 4.0% later this year. But as the rises are most likely to be confined to measures that capture expectations over the next 12 months rather than over the next 5-10 years, we doubt the Bank of England will respond by raising interest rates this year or next.
Paul Dales Chief UK Economist
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UK Economics Weekly

Economy less favourable for whoever’s in Number 10

Although it is hard to predict whether by the end of next week Boris Johnson’s reign as Prime Minister will be solidifying or crumbling, we know that whoever is in Number 10 over the next year will have to deal with the cost of living crisis. Our forecast that inflation will rise to a little above 7% explains why we think GDP growth this year will fall short of the consensus forecast and why we think interest rates will be raised further than most expect, from 0.25% now to 1.25% by the end of the year. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.

21 January 2022

UK Data Response

Retail Sales (Dec.)

The fall in retail sales volumes in December was bigger than expected and supports our view that the Omicron outbreak in the run-up to Christmas may have dragged down GDP by 0.5% m/m, if not more.

21 January 2022

UK Economics Update

Real wage squeeze unlikely to be a rerun of 2008-14

The looming squeeze on real wages means that the near-term outlook for consumption and GDP has weakened. That said, we don’t expect anything as bad as the squeeze in 2008-14. In fact, real household disposable income may well recover by early 2023.

20 January 2022

More from Paul Dales

UK Economics Chart Book

Recovery becoming more tepid

With a whopping 1.0 million people on average having been asked by the NHS App or Test & Trace system to self-isolate in July, the “pingdemic” is likely to have stifled the economic recovery in recent months. In July, our Capital Economics BICS Indicator suggests that GDP did not rise much. But new virus cases have fallen substantially since mid-July and there are signs that the full vaccination of 75% of all adults has weakened the link between COVID-19 cases and hospitalisations. So we still think the economy will make good headway in Q3 and that monthly GDP will return to its pre-virus February 2020 level in October. However, it’s possible that virus cases start to climb again, which at some point could prompt the government to become worried about hospital capacity and respond by reimposing restrictions. That remains the biggest downside risk to our economic forecasts.

11 August 2021

UK Markets Outlook

Economy and policy to provide a bit less support

The recent downward revision to our GDP growth forecasts and the recent hawkish signs from the Bank of England which prompted us to bring forward our forecast of when monetary policy will be tightened means the economic backdrop is a bit less conducive towards rapid gains in risky assets than we previously thought. Admittedly, we still think that the economic recovery will be healthier than most forecasters expect and that the Bank of England won’t tighten policy until a year after the mid-2022 date assumed by the financial markets. As such, we still expect the FTSE 100 to gain some ground on the S&P 500 over the next couple of years. And we think that by rising only modestly from about 0.60% now to 1.25% by the end of 2023, 10-year gilt yields will increase by less than 10-year US Treasury yields.

9 August 2021

UK Economics Update

Inflation expectations & pay growth key to policy tightening

A bumper rise in utilities prices in October could contribute to CPI inflation climbing to a 10-year high of 4.4% in November. But as we don’t expect higher CPI inflation to feed through into higher inflation expectations or faster underlying pay growth, we doubt the Bank of England will respond by tightening monetary policy until things change in 2023.  

3 August 2021
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