Huw Pill, incoming Chief economist at the Bank of England gave an exclusive interview with the Financial Times this week. "I would not be shocked", he said "If we were to see inflation close to 5% or above in the coming months."
"With an inflation target of 2%, this would be an uncomfortable place for a central bank to be" he added. Governor Andrew Bailey had excited markets earlier this week, suggesting the Bank would "have to act" to curb inflation.
Some analysts think the MPC will act to increase rates by perhaps 15 base points in the November meeting. The Bank had previously said, it expected inflation to hit 4% by the end of the year before easing back into the second half of next year. Pill was of the view the MPC was "finely balanced" over whether to raise interest rates or not.
The latest inflation data would not be much help. The CPI headline rate slowed to 3.1% in September from 3.2% prior month. Goods inflation increased to 3.4%, service sector inflation fell to 2.6%. Basing effects related to the "Eat Out to Help Out" campaign last year, largely explain the drop in service sector prices. Even so without the campaign effect, the headline rate would have been 3.2% to 3.3% at best, hardly a step towards hyperinflation and stagflation.
Producer Prices continued to demonstrate the pressure on manufacturing prices. Output prices increased to 6.7% in September, consistent with a 3.4% increase in consumer goods prices. Input costs increased to 11.4%. Oil, metals and minerals are driving costs higher. This week, Brent Crude closed up at $85.30 dollars a barrel, compared to $41 dollars last year.
Earlier in the year, our models had suggested inflation would peak at around 3% in August before easing back towards the end of the year. The "stickiness of oil prices" suggests this scenario is too benign. Last year Brent Crude Prices increased to $50 dollars by December. We still expect oil prices to was back to $80 dollars in the final quarter. The inflationary impact on producer prices will ease either way. We may have seen the worst of the cost price pressure. We would not expect the headline CPI rate to rise over much from here.
This week Unilever suggested Marmite prices will have to rise by 4%. Product shrink-flation suggests the Cadburys Double Decker may soon be rebranded as a "Minibus".
Pill concluded, "We do not see, given the transitory nature of what we are seeing in our base case, the need to go to a restrictive policy stance."
Inflation is always and everywhere a transitory phenomenon. In the US, the Fed is trying to convince the public, inflation may turn out to be a little stronger for a little longer than forecast. "Transitory" didn't feature at all in the September FOMC minutes ...
Growth Picks Up In October ...
The UK recovery regained momentum in October. The IHS Markit / CIPS flash Composite PMI® data was released this week. Markets just love the headline data.
The October index closed up at 56.8 from 54.9 in September. The service sector index closed up at 58.0 a three month high. The data highlighted a "robust and accelerated" increase in private sector business activity. Survey respondents reported buoyant business and consumer spending as pandemic restrictions are rolled back. New business volumes increased at a strong pace in October. It was the fastest rate of expansion since July.
The manufacturing sector was hit by supply shortages and rising energy and material prices. The headline index fell to 50.6. a nine month low. Still in positive territory but only just. It was the lowest level for eight months. Producers commented on difficulties meeting demand, a result of capacity constraints from lengthy supply lead times and staff shortages.
Producers reported faster rates of new orders with a drop in production linked to capacity restraints. Stocks were depleted. Recovery in the sector hindered. The official output data confirms slowing growth in the sector. We still expect manufacturing growth of around 8% this year, last year's set back was so severe. The tectonic shift in the supply and demand plates nowhere more evident than in manufacturing. We expect GDP growth forecasts for the current year to be revised up to 7.5% to 8% or possible more.
Strong Growth Reflected in Borrowing Figures ...
Strong growth is reflected in the government borrowing figure released this week. Borrowing in the first six months of the year was £108 billion compared to £209 billion over the same period last year. For the year as a whole borrowing could fall to £150 billion. This compares to the OBR forecast of £234 billion at the start of the year, postulated on the basis of 4% growth in the economy.
Interesting to see what lies in the Budget Red Box next week. No real need for tax rises at this stage in recovery. No time to hike corporation tax, no need for a rise in NI employment tax. Strong revenues are flowing into the Treasury coffers. The deficit will fall to pre Covid levels within two years ... no need for strong action at the Despatch Box ... unless the Treasury thinks it has a point to prove ...
The Saturday Economist
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