The rise in consumer prices is not widespread

A deeper dive into the CPI figures supports our initial analysis that the bulk of the jump in inflation from 2.0% in July to 3.2% in August is due to base effects linked to falling consumer prices in August last year rather than a widespread and significant surge in prices this August.
Paul Dales Chief UK Economist
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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

UK Data Response

Retail Sales (Aug.)

The fourth consecutive fall in retail sales in August isn’t as bad as it looks as some of it reflects households spending more on non-retail items as life returns closer to normal. But as non-retail spending isn’t soaring, the economy probably didn’t regain much momentum after stagnating in July.

17 September 2021

More from Paul Dales

UK Data Response

GDP & International Trade (Jul.)

The rise in COVID-19 cases and the product/labour shortages are probably behind the stalling in the UK’s economic recovery in July. With next week’s CPI release set to reveal a jump in inflation from 2.0% to around 3.1%, there is a whiff of stagflation in the air.

10 September 2021

UK Economics Chart Book

Shortages stifling activity and boosting inflation

The broadening of the recent product and labour shortages appears to be holding back activity and adding to the upward pressure on inflation. The risk is twofold. First, these shortages may prevent GDP from returning to its pre-pandemic peak until next year. After all, the rise in the share of manufacturers reporting labour shortages is consistent with manufacturing output falling by 5%. Second, they could mean that inflation jumps by more than the rise from 2.0% in July to 4.5% in November we already expect. We think most of the shortages will be temporary. That means inflation will probably fall back to 2.0% by late 2022 and the Bank of England may not raise interest rates until 2023. But if the shortages last longer, inflation may stay higher for longer and the Bank may pull the interest rate trigger next year.

9 September 2021

UK Economics Focus

The economics of Scottish independence look more difficult

The interactions between Brexit, the deterioration in Scotland’s fiscal situation and the continued lack of an easy option for the currency have made the economics of Scottish independence even more challenging than at the time of the first referendum in 2014. This doesn’t mean an independent Scotland couldn’t be an economic success. But it would require Scotland to put in place credible plans to cut the budget deficit. The resulting fiscal squeeze would restrain economic growth and mean that in its first 5-10 years, an independent Scotland is more likely to fall further behind the rest of the UK than catch it up.  

7 September 2021
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