It was a week which started off pretty well. The PMI Markit Flash Forecast for December, suggested the rate of growth was slowing towards the end of the year. The headline index closed at 53.2 from 57.6 prior month.
A slowdown, yes but still well into positive territory. Concerns were rising about tighter pandemic restrictions and greater business uncertainty. Manufacturing activity appeared to be the better performer, compared to the challenges in the service sector.
On Tuesday, the Labour Market Statistics were released. Concerns had been expressed about the shock to the jobs market once the furlough scheme came to an end. Fears were, of an increase in redundancies and job losses, with an escalation in the unemployment rate towards 5%. The Chancellor planned a trip to California, just in case the headlines were too intense.
The reality was quite different, Vacancies in the economy increased.. The unemployment rate fell. The number of people unemployed fell to 1.4 million. There were 1.2 million vacancies in the economy. In the Goldilocks scenario, average earnings, excluding bonus pay, slowed to 4.3%. Goldilocks' three bears might suggest the economy is in danger of over heating. It was a message the Bank of England could not ignore.
On Wednesday, the inflation data for November was released. Producer output prices increased to 9.1%. Manufacturing input costs increased to 14.3%. The largest contributor to the price hikes was petroleum costs. Chemicals, metals and machinery also featured. Oil prices Brent Crude basis averaged $81 dollars in the month, compared to $43 dollars last year. Petroleum products (excluding duty) were up 86% in November. No real surprise there.
CPI inflation jumped to 5.1%. Consumer goods inflation increased to 6.5%. Electricity, gas and other fuels increased by over 23%. Second hand car prices leapt by 27%. Furniture prices were up by 11%. Household appliances were up by 6%.
Central bankers became less convinced that inflation is always and everywhere a transitory phenomenon. In the U.S., the Fed determined to stop buying bonds and mortgage backed securities in March next year. In the U.K., the MPC voted to increase base rates by 15 basis points.
The rate hike in December was a surprise. The first increase pre Christmas for over fifty years at least. So what happens next? In our Friday Forward Guidance we outline the possibility of two or three rate hikes next year in the U.S. and the U.K. Inflation pressures will ease into the second half of the year as oil price comparisons dissipate.
Concerns will rise about the ability to develop monetary policy to curb inflation without creating a recession. Larry Summers writing in the Washington Post has already begun the process. "There have been few, if any, instances, in which inflation has been successfully stabilized without recession" he warns.
Concerns are rising about the impact of the Omicron variant. Despite assurances from the Prime Minister, the possibility of a lock down may gather momentum into the New Year. The hospitality sector is already feeling the impact of Chris Whitty's warnings to cut back on social events and think about with whom they would like to spend the time.
So a week of surprises to end the year. Tories lost the North Shropshire by-election. Boris Johnson is drinking in the last chance saloon, according to Sir Roger Gale, the MP for North Thanet. Perhaps the Prime Minister will get more time to spend in Peppa Pig World next year. Senior backbenchers believe he has a year to sort himself out ... or dig deeper ...
The Saturday Economist
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