The Bank of England revised up its forecast for the UK economy this week. Growth of 7.25% is expected in the current year. In February growth of just 5% was anticipated.
The success of the vaccine program, pent up demand amongst households, gross savings and the extension of measures to protect jobs and businesses, improved the outlook for the current year.
Growth is expected to slow to 5.75% next year. Over the two years, the bank is forecasting growth of 13% compared to 12.25% last time. It is the shape of recovery, rather than the quantum of recovery, providing the major difference.
The bank expects inflation to move above target and hit the 2.5% CPI level later this year. This is largely due to rising energy prices and the comparison effects of price falls recorded last year. Thereafter inflation is expected to return to target as domestic demand and the comparison effect of energy costs from 2020 impacts on producer and retail prices.
"Transitory" is the new word in the central bank inflation vocabulary. Both the Fed in the US and the Bank in the UK are keen to see through any short term "drift" above the inflation target. Maintaining an accomodative stance for monetary policy is the priority. The Bank held rates and maintained the asset purchase plan in place for the moment.
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The Economy is Hotting Up ...
The bank forecast for jobs is pretty optimistic. The unemployment rate is expected to hold at the 5% level this year before easing to 4% over the next two years. We outline our views in the TSE Club special. The outlook for jobs and inflation appears to be "transitory". Expect revisions.
This week the latest PMI data suggested the economy is hotting up. The manufacturing index increased to 60.9, the service sector index hit 61.0 and the construction index eased to 61.6. What does this all mean? We examine the details in our monthly TSE Club PMI Monthly Review, out next week
So what does this mean for inflation?
Commodity prices are rising. Copper soared to an all time high this week. Futures rose above $10,000 dollars. Iron Ore prices moved to an all time high. Strong demand from China pushed prices above $200 dollars per tonne.
In the UK construction industry costs are accelerating. Timber has increased by 80% in the last six months. Polymer costs are up by 60%. Copper and steel costs have increased by 40% with more price rises to come. Paints and vanishes are up by one third.
Monetarists are worried about the surge in liquidity. In the US broad money M2 increased by 24%. In the UK M4 money increased by 12.5%. Soon it will be time to worry about what happens next after what happens next. It could be sooner than you think. Don't worry about inflation, it could be hyperinflation we should be worrying about.
We will cover this and more at the next Saturday Economist Live episode on Thursday 27th May at 9:00 am. Don't Miss that ... Fast moving, content rich and fun ... and slightly controversial ... of course ...
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