 Headline CPI inflation picked up sharply to 2.3% in October, spooking markets and lowering expectations of a December interest rate cut. The jump marked a sharp increase from the 1.7% rise recorded in September, exceeding the 2.2% forecast of economists polled by Reuters. The latest data brings inflation back above the Bank of England's 2% target, dampening the prospects of a final interest rate cut this year. Core inflation, which excludes energy, food, alcohol and tobacco, came in at 3.3% for the month, up slightly from 3.2% in September. The uptick was due in part due to an increase in the energy price cap that took effect in October. CPI goods annual rate increased from minus 1.4% to minus 0.3%. Goods inflation continues to subsidise the headline rate. Price rises in the U.K.'s service sector ticked up to 5.0% from 4.9% in September, a major cause for concern for the MPC. Speaking before the Treasury Select Committee earlier this week, Governor Andrew Bailey said that inflation in the UK's services sector remained too high and was incompatible with bringing prices back to 2 per cent. The increase in minimum wage and the changes to National Insurance costs are likely to maintain price pressures into the New Year, especially in the service sector. The governor warned "The introduction of higher national insurance tax on employers poses uncertainty for future interest rate cuts." "The increase in employers' national insurance contributions announced in last month's budget was one of the biggest uncertainties ahead". "There are different ways in which the increase in employers' national insurance contributions announced in the autumn budget could play out in the economy," Bailey said. "If it raised the cost of employment and led to job cuts, it would soften the labour market and force the Bank to lower rates gradually", he said. "On the other hand, if the increase in costs was passed through to higher prices, the MPC would be forced to address the increase in inflationary pressure. The increase in employers' national insurance contributions could keep rates higher for longer." "A gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook." His warning came after major retailers wrote to the chancellor Rachel Reeves warning that shops will close, jobs will be lost and prices will have to rise because of the decision to raise employers' NICs in the budget. Economists estimate that future job losses will be in the range of 80,000 to 100,000 over the next five years.  The Bank expects inflation CPI to peak at around 2.8% in the third quarter of 2025 before returning to the 2% target in 2027. Market expectations of base rate trends have risen with six month gilts trading at 4.5%, ten year gilts trading at 4.4% at close of week.
The Bank's favoured OIS overnight swap rates are trading at 4.5% to 4.0% on a six month to ten-year spread. As of Wednesday morning, markets were pricing in just a 14% chance of a further quarter point cut this year. We expect a move to 4.5% as the next bank move but not until the end of the first quarter in 2025. Then not much more after that. Borrowing figures this week will do nothing to ease pressure on gilt yields. Thursday's ONS release revealed borrowing in the first seven months of 2024-25 was £96.6 billion. This was £1.1 billion above the same period last year. The year-on-year increase was driven primarily by higher central government spending, particularly departmental consumption expenditure and welfare spending. Strength in receipts compared to last year has offset a significant portion of the higher expenditure, the OBR said. Borrowing for the whole of 2024/25 is expected to be £2.4 billion higher than last year, £127.5 billion compared to £125.1 billion in 2023/24. The Debt Management Office will be looking to find a home for £300 billion of gilts, including roll overs, in the current financial year. Let's hope the kindness of strangers persists. The prospect of higher rates did nothing for Sterling this week. The Dollar bounce back continued, pushing the Pound to $1.25, down from the heady heights of $1.34 in September. The Euro cross rate closed at $1.04 as a Dollar push to parity comes into play. Bitcoin traded at $99,352 intra day yesterday. Maybe a tree (or a tulip bulb) can hit the sky ...
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 The Chancellor and the Growth Stats ... Three months into office and Rachel Reeves is dismayed by the performance of the economy. The Chancellor of the Exchequer is disappointed with figures showing the economy is flatlining in the months since Labour came to power. The chancellor promised "economic growth is at the heart of everything I am seeking to achieve". Official figures showed Britain's economy grew by just 0.1 per cent between July and September. "I want growth to come stronger and sooner" she said. "I am not satisfied with these numbers. Not when we consider the ONS had suggested the economy was growing at a "Gangbuster Rate" under the Tories at the start of the year. The Chancellor is missing the point, or rather the decimal point. The focus of the budget was clearly on bridging the fiscal deficit with a big surge on employment tax via the NI employers surcharge. The performance of the economy was always set to take second place. Not much in the budget to stimulate growth in the short term. Look into the detail of the GDP monthly estimate for September, released on Friday and maybe things ain't that bad. Growth year on year (our favoured measure GVA3) was up by 1% in the third quarter. It was up by just 0.2% in the first quarter and O.7% in the second quarter. So much for the "Gangbuster Growth" at onset. The Government could claim things are getting better under Labour but not by much. Assuming growth of 1.3% in the final quarter, that would generate an annual growth rate of less than 1% for the year as a whole. The economy will struggle to hit the OBR 1.1% forecast for growth this year. Heaven knows, or maybe the OBR model knows, how growth will hit the forecast growth of 2% growth next year. It could get better. Manufacturing and construction output was down by 1% and 0.4% in the latest quarter. Service sector growth was up by 1.5% with a strong performance in transport, storage, accommodation and food. Professional, scientific and technical services were up by almost 2%. Our scenario forecast is for growth of 1.0% this year and 1.5% next. Yes we all want growth to come stronger and sooner but want doesn't always get. The Governor of the Bank of England was in feisty mood his week at the Mansion House. Brexit had a negative effect on the British economy he said. Britain must rebuild relations with Brussels and warned of the economic consequences of Brexit. He also had a pop at the ONS and the job stats' "I am not happy with these numbers" he said.  The Governor and the Job Stats ... The Governor took a pop at the Office For National Statistics. The Chancellor may be disappointed with the growth stats, the Governor is disappointed with the job stats. "The UK's unreliable labour market statistics have become a "substantial problem" for the Bank of England. We are making interest rate decisions without accurate data on how many people are in the workforce", Andrew Bailey said. In a speech to City financiers at Mansion House on Thursday night, the Governor made his most pointed comments yet about the failure of the Office for National Statistics to collect enough reliable data on the jobs market. The UK's official statistics body is failing to get enough people to respond to its monthly Labour Force Survey, forcing the Bank to rely on alternative measures as it makes key decisions. "The travails of the Labour Force Survey are quite well known," Bailey said. "It is a substantial problem and not just for monetary policy. We don't know how many people are participating in the economy. It would help if across the country we were better at answering the phone when the ONS calls up." In response the ONS said "We advise caution, particularly when interpreting short-term change in the Labour Force survey, and encourage users to make use of a wide range of data sources where possible." Worrying isn't it. The latest figures suggest the unemployment numbers (000) increased to 1,486 in September. In August they had fallen to 1,386 from 1,487 in July. The unemployment rate increased to 4.3% in September from 4.1% in August and 4.2% in July. The Governor has a point. So how to make the forecasts accurately? The Bank forecasts the unemployment rate will hit 4.5 per cent in three years time. It does, however, acknowledge the danger of a bigger negative budget impact. "There is a risk that changes in the overall cost of employment for firms, including the increase in employer NICs and the national living wage, lead to greater cashflow constraints for some businesses, particularly SMEs" it said last week. The OBR, in fact, sees unemployment falling, not rising, because of the increase in public spending announced by the chancellor. "Supported by the temporary boost to demand from this budget, the unemployment rate falls from 4.3 per cent this year to 4.0 per cent in 2026 before returning to its estimated structural rate of 4.1 per cent in 2028," according to the latest economic and fiscal outlook. So why the big difference? The OBR forecasts growth of 1.8% in 2026. The Bank pencils in a more modest 1.25%. Confused? Don't be! Stay tuned to the Saturday Economist updates. Next week, we look at the forecasts for inflation and interest rates. Worth a closer look.  "A week can be a long time in politics", claimed Harold Wilson, now so much has happened in just the past five days. Despite two impeachments, four indictments and his new status as a convicted felon, Trump is set to return to the White House as the 47th President of the United States with Republican control of Senate and the House. Elected to a second term, the Republican has threatened to prosecute his political enemies, send the military into the streets of U.S. cities to target illegal immigrants, introduce mass deportation, impose 10% tariffs on U.S. imports, with a bonus 60% surcharge on imports from China. Many of the agencies central to the federal government will be purged of never Trumpers and replaced with loyalists. Trump advisers believe they wasted early opportunities in his first term, because they were unfamiliar with how to maximize central government power. They're planning a very different outcome this time. The Fed will be subject to Presidential influence on monetary policy, Fed Chair Jerome Powell may be sacked. In his first term, Trump called the Fed an "enemy" of the US and its officials "boneheads" and "pathetic". In August, he said of interest rate decisions: "I feel that the president should have at least a say in there. I feel that very strongly." Internationally, Trump will end the war in Ukraine and the Middle East and accelerate plans to open a Trump hotel in the Kremlin. He will test the commitment to NATO and encourage other member states to "cough up their fair share of costs." In the U.S. Musk and other millionaires and billionaires will ready for a feed fest of payback for election support. After pouring at least $130 million in a pro-Trump campaign effort, Tesla CEO Elon Musk is positioned to be paid back handsomely, it is claimed. More government contracts for Starlink. More support for Tesla in the fight back against Chinese EVs. SpaceX has received more than $19 billion from contracts with the federal government since 2008, including from NASA, the U.S. Air Force and Space Force. EVs imported from China will see their tariffs more than quadrupled from 27.5% to 100%, boosting sales prospects for Tesla.  No Nolan principles for the Trump regime. Selflessness, integrity, honesty, accountability and the rest will be tossed into the Rose garden, just behind the compost heap of objectivity and openness. Harris and her fellow Democrats warned during the election, a 248-year-old democracy is on the ballot, and the whole world is watching. The world readies for Trump 2.0. Fed Chair Jerome Powell has said he will not resign. "No", Powell said firmly on Thursday, when asked whether he would step aside, if Trump asked for his resignation. Powell has made it clear he's ready to defend the US central bank from political pressure saying he wouldn't resign if asked, insisting the president doesn't have the power to fire him or other senior Fed leaders. The governor of America's most populous state, California, says he will convene a special session of the legislature to protect state laws from Donald Trump. Gavin Newsom, said Trump's victory threatened the heavily Democrat state's values. "The freedoms we hold dear in California are under attack. We won't sit idle," he said. Other blue states are moving quickly to prepare game plans. In New York, governor Kathy Hochul said she, senior staffers and the attorney general plan to meet regularly to discuss legal strategies to protect "reproductive rights, civil rights, immigration, gun safety, labor rights, LGBTQ rights and our environmental justice". In the wider world, manufacturers in China are accelerating plans to relocate to Cambodia, Vietnam, Brazil and Mexico. China has warned there are no winners in trade wars, announcing a five-year package totaling 10 trillion yuan ($1.4 trillion) to tackle local government debt problems, signalling more economic support would come next year, to boost domestic consumption. British Foreign Secretary, David Lammy, has warned Trump against "hurting" allies with his tariff plan. The Foreign Secretary says "raising levies on foreign goods would not be in the medium or long-term interests of the US." Excellent. Sure to have the ear of the President, (the one not shot at) Lammy has previously described the President elect as "deluded, dishonest, xenophobic, narcissisti and a neo-Nazi sympathising sociopath". Trump may not be so ready to heed the Foreign Secretary's advice.  The Bond Vigilantes Are Watching ...
Trump in the end may be constrained by levels of debt and the bond vigilantes. The level of debt in the US has risen to $36 trillion dollars, tha's over 120% of GDP. Trump says he will renew his tax cuts, which are due to run out next year, at a cost of nearly $4 trillion for the next decade, as well as cutting taxes for companies further. That could double the deficit from its current level of 6 per cent to 12 per cent of GDP. His plans to raise tariffs to protect American industry and to kick out immigrants will push up prices further and damage growth. Rising inflation will force the Federal Reserve to raise interest rates, which will further increase the cost of government borrowing, which will further increase the debt. This week, the FOMC cut interest rates by 25 basis points. Markets had expected a further cut in December and more in 2025. Wall Street economists now see Fed policymakers keeping interest rates higher than they otherwise would have, given the likely inflationary effect of Trump policies. Nomura, for example, anticipate only one reduction in 2025, with monetary policy on hold until the inflation shock from tariffs has passed. Ten year bond yields have risen to 4.3% compared to 3.8% at the end of September. We still consider 4.5% ten year bond yields to be the benchmark in the new Trump expansionary era. In a quasi dictatorship, banana republic, the stakes would be even higher. What price the dollar then ...  We were promised a budget for growth. In reality it looked like a classic Labour Budget, taxes up, spending up, borrowing up. Debt set to average almost 100% of GDP, tax revenues set to hit 38% of GDP. Government spending set to average 45% of GDP.
The Prime Minister had promised to reach for the Growth Lever. Instead, the Chancellor grabbed the Tax Lever increasing the tax burden by a massive £40 billion. As for growth, the Office For Budget Responsibility suggested output would be little changed at the end of the forecast period. A sugar rush of government spending would generate a growth surge of almost 4% over the first two years of the plan. Thereafter economic growth would moderate to an average 1.5% over the period 2027 to 2029. Are the growth forecasts so bad? Growth in the UK was just 0.1% in 2023 and an expected out turn of 1.1% in 2024. Many commentators would settle for base line, non inflationary growth of 1.5% over the medium term. Should we place any reliance on the OBR forecasts more than two years out? Time will tell if the forecasts will be realised to any degree of accuracy. Too soon to hoist the Chancellor by that particular petard. Government spending on investment is set to surge by 6% in 2026 and by £100 billion over the next five years. The investment spending will boost growth. The problem it may take a stretch into a second parliamentary term to realise the real gains in National Income levels. Inflation CPI is set to increase to 2.6% next year and 2.3% in 2026, returning to target 2% by the end of the forecast period in 2029. Unemployment is set to average 4.1% over the five years. Moderate growth, low inflation and stable employment levels, what’s not to like? Spending Plans ... Chancellor of the Exchequer Rachel Reeves delivered a Budget to “Fix the Foundations of Our Economy.” It could have been called, “Mopping Up The Mess” of fourteen years of Tory mismanagement. The Government inherited a £22 billion Black Hole. In reality it was more like a £9.2 billion pothole. The incoming government had to tackle the problem of public sector pay, setting the issues of conflict with Junior Doctors and other NHS staff. Public Sector Net Borrowing was set to hit £120 billion this year, well before the Budget numbers revised the spending plans. The good news is the budget spending plans recognised the commitments to compensate the victims of two major public scandals. Some £11.8 billion will go to those impacted by the infected blood scandal and £1.8 billion will be paid to victims of the Post Office Horizon debacle. On day to day spending, the Red Book states “The Chancellor plans to protect public services as departments’ day-to-day spending is set to grow by an average of 3.3% in real terms between 2023-24 and 2025-26, including an increase of more than £22 billion for the NHS to help bring down waiting lists and £4 billion for the education sector to stop schools falling down. The Budget will provide a boost to public investment by over £100 billion over the next five years across roads, rail, schools and hospitals. Public Sector Investment will average 2.5% of GDP over the period compared to a planned fall to 1.7% under the Tories. Tax Hikes ... The Budget confirmed increased National Insurance contributions for employers, higher stamp duty on second homes, and the removal of the VAT exemption on private school fees. Passenger levies were also hiked on private jets. The budget’s biggest measure, the £25 billion rise in national insurance came under pressure from the IFS. “It will not get them anything like the £25 billion stated on the scorecard,” Paul Johnson said. “The OBR noted it will result in lower wages, lower hours and some job losses. This will reduce the amount raised from employer national insurance, employee national insurance and income tax revenues. Tom Peck writing in the Times claims the day after a budget, no one really cares anymore what the chancellor has to say. The only view that really matters is that of Paul Johnson, the head of the Institute for Fiscal Studies, who has for some years hosted a post-budget briefing. He sits in his corner office and systematically dismantles everything that was said the day before. If you were being gentle, you’d call it the budget’s elephant graveyard. Really it’s a budget abattoir. Budgets don’t fall apart, he rips them apart. “I’m afraid this looks like the same game playing we got with the last lot,” Johnson said. He gently pointed out that all the government departments who’ve been given 4 or 5 per cent budget increases this year, aren’t going to be placated by the projected 1 per cent increases thereafter. This, he said, was: “Pencilling in implausibly low spending commitments in the future, in order to make the arithmetic balance, repeating the same silly manoeuvres.” He pointed out that future projections also depended, for example, on ending the freeze on fuel duty, which has been in place since 2011, because no chancellor would dare. Not in a Happy Place … The Bond Market Vigilantes Look On … The Chancellor’s plans prompted an adverse market response, with ten year government bond yields rising to 4.5% yesterday before easing back to 4.4% at close of week. Hardly a Liz Truss moment but enough to set off tremors in the Treasury and raise fears of a Gilt Strike. Ratings agency Moody's said British finance minister Rachel Reeves' first budget will create new challenges to efforts to strengthen Britain's public finances, with the UK still facing muted growth, the Financial Times reported on Friday. While the NHS stands to benefit, other sectors face challenges. GPs, care homes, dentists, and hospices are pushing back against the National Insurance hike, while farmers worry about inheritance tax forcing them to divide family land. Rural communities are also questioning a 50 per cent increase in the bus fare cap. Hospitality and retail business are reeling from the 6% hike in minimum wage compounded by the increase in National Insurance. Business closures and job losses may follow. Chancellor of the Exchequer Rachel Reeves delivered a Budget to “Fix the Foundations of Our Economy.” Let’s hope so … The Bond Market Vigilantes Are Watching ... |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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