Rapid recovery and rising inflation risks

The 2.1% m/m gain in GDP in March added to other evidence that the economy is recovering more rapidly from the COVID-19 crisis than even our above consensus view had suggested. As a result, we have nudged up our 2021 GDP forecast. However, the rapid recovery is raising fears of a surge in inflation, which spooked markets this week. We don’t think inflation will stay at 2.0% until 2023, which means it could be 2024 before the Bank of England tightens policy.
Thomas Pugh UK Economist
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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 Data Response

GDP & International Trade (Apr.)

The jump in GDP in April was another sign that consumers are raring to spend as the economy reopens. And all the early indicators suggest that GDP growth was strong in May as well. As such, our forecast of the economy regaining its pre-pandemic level by the autumn is on track.

11 June 2021

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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

More from Thomas Pugh

UK Data Response

Money & Credit (Apr.)

April’s money and credit data suggests that consumers were still wary about taking on any additional debt. But even if consumers’ willingness to borrow remains limited, they have enough firepower to finance a spending spree through rising incomes and by saving a smaller share of their income.

2 June 2021

UK Economics Weekly

Troubles in construction unlikely to be repeated elsewhere

Output in the construction sector was already 2.3% above its pre-crisis level in March and there is evidence that supply constraints are starting to bite. However, there is still plenty of spare capacity in the economy as a whole and much of the increase in the prices of construction material is being driven by a global shortage. As such, we do not expect the situation in the construction industry to be repeated in other sectors when they reach their pre-crisis peaks.

28 May 2021

UK Data Response

Labour Market (Mar./Apr.)

Today’s data release suggests that the labour market is now on the front foot. Admittedly, the unemployment rate may still rise over the rest of this year. But this will probably be due to people re-joining the labour market rather than more people losing their jobs.

18 May 2021
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