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There are two reasons why we now think the Bank of England’s Monetary Policy Committee (MPC) will hike interest rates in 2022 rather than in 2023. First, underlying wage growth and inflation expectations have risen by more than we expected. These are …
24th September 2021
While rates were left at +0.10% in an 9-0 vote and the Bank of England’s target stock of purchased assets at £895bn, today’s Monetary Policy Committee (MPC) policy statement suggests that the Bank is moving closer to raising interest rates. As such, we …
23rd September 2021
Weaker activity and rising inflation may make life tricky for the MPC The small fall in the composite activity PMI in September indicates that the economy lost a little more momentum. But at the same time, there were clear signs that price pressures have …
The recent rises in 2-year and 10-year gilt yields to their highest levels since the “dash for cash” at the start of the pandemic have entirely been driven by the investors revising up their expectations for inflation. Indeed, 10-year break-even inflation …
21st September 2021
Borrowing undershoot won’t stop the Chancellor unwinding the fiscal boost 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 …
On the back of the surge in inflation from 2.0% in July to 3.2% in August and the blistering increases in wholesale gas and electricity prices, investors are now pencilling in a rise in Bank Rate from 0.10% to 0.25% in Q1 2022 and to 0.50% at the start of …
17th September 2021
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 …
Retailers struggle as households spend elsewhere 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 …
MPC’s position that interest rate hikes are on the horizon won’t have changed But the weak near-term growth outlook means that a rate rise is unlikely soon We think that Bank Rate will remain unchanged at 0.10% until 2023 The Monetary Policy Committee …
16th September 2021
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 …
15th September 2021
Climb in inflation towards 4.5% to be an uncomfortable ride for the MPC The leap in CPI inflation from 2.0% in July to a nine-year high of 3.2% in August (consensus 2.9%, CE 3.1%) is the first step in a rise that may take inflation to 4.5% or above by …
Labour market still tightening despite unwinding of the furlough scheme The latest data brought more signs that labour market slack is declining fast and that labour shortages are contributing to faster underlying pay growth. We suspect that beyond the …
14th September 2021
The stalling in the economic recovery in July doesn’t mean the recovery is over. But the 0.1% m/m rise in GDP in July revealed on Friday (see here ) does illustrate that the recovery has entered a slower and more challenging phase. To some extent this was …
10th September 2021
Virus cases and shortages stall the recovery 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 …
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 …
9th September 2021
The net effect of today’s announcements on social care reform may provide a very small boost to GDP. But perhaps more important is that by funding more spending on social care by raising taxes, the government has some room to increase spending further, …
7th September 2021
For most of the pandemic period, policymakers have been worrying that there will be too much unemployment. But now the fear is that there aren’t enough workers to fill all the jobs! Admittedly, there are still some lingering concerns that when the …
3rd September 2021
Reports that shortages of heavy good vehicles (HGV) drivers have become more acute and have raised drivers’ pay will do little to ease fears that higher wage growth could persistently lift CPI inflation next year. But unless labour shortages spread to …
Households’ appetite for credit subdued The latest money and credit figures do little to ease mounting concerns that the resurgence in virus cases in July and so-called “pingdemic” brought the consumer recovery to a halt. Consumers did not borrow …
31st August 2021
The list of anecdotal reports of labour and product shortages has grown ever longer in the past week and now includes McDonald’s milkshakes and various items at Greggs. These add to the broadening range of sectors, such as hospitality, wholesale and …
27th August 2021
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 …
25th August 2021
Recovery slowing more quickly than we had thought The chunky fall in the composite activity PMI suggests that the economy struggled to gain fresh momentum in August despite the apparent easing of the “pingdemic” and the final relaxation of all domestic …
23rd August 2021
July’s fall in CPI inflation from 2.5% in June to 2.0% was the first time since March that inflation has surprised the consensus on the downside. But it probably won’t have provided the Monetary Policy Committee (MPC) with much relief, for two reasons. …
20th August 2021
Retail sales slump, but better news on the public finances While there was good news on public borrowing, the slump in retail sales added to other evidence indicating that in July the economic recovery slowed to a crawl. Although public sector net debt …
Still on course to reach 4.5%, despite July’s fall July’s drop in CPI inflation is likely to be followed by sharp rises in the next few months, taking inflation to a peak of about 4.5% by the end of the year. But provided the spike in inflation does not …
18th August 2021
Surge in earnings growth, but underlying pay pressures contained The latest batch of data brought signs that labour shortages are feeding through into higher pay growth in certain sectors. But underlying pay pressures were reasonably contained overall, …
17th August 2021
The GDP figures for June, which showed that the economy grew by 1.0% m/m after the 0.6% m/m rise in May, was an impressive result given the surge in COVID-19 cases in that month. (See here .) But we warned a couple of weeks ago that the “pingdemic”, which …
13th August 2021
Recovery regains some momentum The media headlines have focused on the big 4.8% q/q gain in GDP in Q2, following Q1’s 1.6% q/q fall. But the real news was the unexpectedly strong growth in June which suggested that the recovery maintained a bit more …
12th August 2021
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. (See here .) In July, our Capital Economics …
11th August 2021
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 …
9th August 2021
We learnt three things from this Thursday’s Bank of England policy decision and were left in the dark on two key issues. As a result, some of our forecasts for money market rates and gilt yields have changed. What we learnt First, the Bank of England …
6th August 2021
The Monetary Policy Committee’s (MPC) policy statement sent a clear signal that higher interest rates are on the horizon. But there were few signs that it is preparing to hike rates soon. What’s more, we continue to envisage inflation dropping back more …
5th August 2021
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, …
3rd August 2021
This week brought further signs that the “pingdemic” weighed on economic activity in July. (See here .) The number of people having been asked by the NHS App or Test & Trace system to self-isolate has almost doubled in the past three weeks, reaching 1.3 …
30th July 2021
The MPC will probably revise up its near-term inflation forecasts. Only Saunders to break ranks to vote in favour of an early end to the Bank’s net asset purchases. The MPC is unlikely to signal interest rate hikes are getting closer. While the Bank of …
29th July 2021
Resurgence of virus triggers some rise in consumer caution The money and credit data showed that consumers were willing to take on more debt in June. However, with consumers accumulating excess savings at a faster pace, there were signs that the …
With a whopping 1.1 million people having been asked by the NHS App or Test & Trace system to self-isolate in the week ending 14 th July, the “pingdemic” has weakened the near-term outlook for activity. (See Chart 1.) After all, the result of some workers …
23rd July 2021
Recovery becoming more tepid The second consecutive decline in the flash composite PMI in July came as no surprise to us as we expected the pace of the economic recovery to naturally slow after the big gains following the reopening of retail and …
Some signs of softening The underlying trend in retail sales volumes is a bit weaker than the 0.5% m/m rise in June suggests. And other evidence indicates that the resurgence in the virus and the “pingdemic” may have taken some oomph out of the overall …
While the resurgence in COVID-19 cases that has recently weighted on UK equities, the pound and 10-year gilt yields (see Chart 1) is clearly a downside risk, our view that it won’t deal a big blow to the global or domestic economic recoveries suggests …
22nd July 2021
Higher interest costs won’t stop deficit from falling quicker than OBR expects June’s public finances figures provided further evidence that the strong economic recovery is feeding through into lower government borrowing. So despite rising debt service …
21st July 2021
In response to the jump in CPI inflation from 2.1% in May to 2.5% in June (see here ) and yet more signs that the labour market is bouncing back (see here ), two members of the Monetary Policy Committee (MPC) this week indicated that policy will need to …
16th July 2021
Job market slack will keep underlying pay pressures contained May’s figures paint a picture of a labour market well on its way to recovery and will further fuel concerns about labour shortages and the possible boost to inflation from higher wage growth. …
15th July 2021
Higher commodity prices and shortages starting to boost inflation The rise in CPI inflation from 2.1% in May to 2.5% in June was smaller than the leap in US inflation to 5.4% released yesterday, but we think the gap between the two will shrink as …
14th July 2021
Supply shortages were once again evident in the final PMIs released this week. June’s manufacturing PMI showed supplier delivery times lengthened still further and the measures of prices paid by firms rose to their highest levels since the surveys began …
9th July 2021
Losing a bit of verve The easing in the pace of the economic recovery in May suggests that GDP is now more likely to return to the February 2020 pre-pandemic peak in October rather than in August. The bigger point, though, is that the recovery so far has …
Bigger rises in commodity and component costs than we had expected mean that we now think CPI inflation will rise from 2.1% in May to a peak of about 4.0% around the turn of the year. But we still think this will be a short, sharp spike in inflation that …
6th July 2021
It’s understandable that the start of the winding up of the furlough scheme on 1 st July (when firms had to start paying 10% of the wages of their furloughed workers) has caused some concern. After all, even after taking into account the cumulative cost …
2nd July 2021
Larger stock of savings an upside to economic recovery The small downward revision to Q1 GDP growth probably won’t stop the economy from rising back to its pre-pandemic peak in the coming months. And the larger-than-expected rebound in the household …
30th June 2021
The recent softening in some indicators of activity is probably mostly a result of shifts in spending patterns within the economy rather than a sign that the recovery has already stalled. As such, we still expect monthly GDP to rise back to its …
29th June 2021
