Data out on Tuesday are expected to show annual consumer price inflation remained at 3.1% in October, having originally moderated to this level in July from 3.2% in June and a 17-month high of 3.7% in April. Core consumer price inflation is seen remaining at 2.7% in September.

This would keep consumer price inflation appreciably above the Bank of England's target rate of 2.0%, and require its governor, Mervyn King, to write yet another letter to the Chancellor explaining why inflation is overshooting its target level by more than one percentage point and what the bank plans to do about it.

In fact, it is very possible that consumer price inflation actually rose in October and it now looks likely to head back up towards 3.5% over the next few months due to higher food, commodity, and oil prices. Furthermore, value-added tax (VAT) will rise from 17.5% to 20.0% in January, although this may not actually push the annual inflation rate up given that there was also a VAT hike in January 2010 (back up to 17.5% from 15.0%).

Consumer price inflation should move below 3.0% in the second half of 2011, as the temporary upward impact from VAT developments, higher energy, commodity and food prices, and sterling's past sharp depreciation wanes. Meanwhile, underlying inflationary pressures should be limited by appreciable excess capacity, muted growth overall, strong competition on the high street, and high unemployment. Inflation will hopefully dip below 2.0% early in 2012, as the impact of the January 2011 VAT hikes drops out.

Unemployment in October

Data on Wednesday are forecast to show that claimant count unemployment rose by a further 5,000 in October, after increasing by 5,300 in September and 3,800 in August. This would take claimant count unemployment up to 1.4781 million in October from a 16-month low of 1.464 million in July. In contrast, claimant count unemployment had fallen by over 30,000 for four successive months through to May. The claimant count unemployment rateis expected to edge up to 4.6% in October from 4.5% in September. The unemployment rate has been at 4.5% since June, which is down from the 12-year high of 5.0% seen in the five months through to January 2010.

Meanwhile, the number of jobless on the International Labour Organization (ILO) measure is seen falling by a much reduced 5,000 in the three months to September to stand at 2.452 million, thereby keeping the ILO unemployment rate of 7.7%. Unemployment on the ILO measure fell by 20,000 in the three months to August. ILO data are also likely to show that employment continued to rise in the three months to September, but at a significantly reduced rate. Furthermore, the rise in employment is expected again to be mainly due to an increase in the number of part-time workers.

Labour market data may well remain mixed in the very near term, but we expect a clear deteriorating trend to increasingly emerge. We suspect that unemployment is headed up over the coming months as a consequence of slower, below-trend growth, rising business caution and public sector jobs being increasingly pared. Specifically, we forecast unemployment on the ILO measure to rise to 2.68 million by end-2011 and to peak around 2.75 million around mid-2012. This would see the unemployment rate rise to 8.4% by end-2011 and to a peak of 8.6% in mid-2012.

Major job losses are on the way in the public sector as the government slashes spending, and we doubt that the private sector will be able to fully compensate for this. Indeed, we suspect that firms will become increasingly cautious in their employment plans, reflecting slower growth and concerns that the intensified fiscal squeeze will hold back economic activity for an extended period. There are also likely to be significant job losses in private companies supplying services or goods to the public sector. In particular, many firms are likely to try to meet any increase in business through making greater use of the workers they have already or using part-time staff, and they are likely to be reluctant to take on any more permanent staff unless they are really convinced that sustained improvement in their business is probable. Significantly, a number of recent surveys suggest that this is indeed the case.

Meanwhile, earnings growth is expected to have risen modestly in September, but to have nevertheless remained very low compared top past norms, reflecting relatively high unemployment, workers' job insecurity and the ongoing need for companies to limit their costs in a still-challenging environment. Annual underlying average weekly earnings growth (regular pay - excluding bonus payments) is seen limited to 2.2% in the three months to September. Meanwhile, annual average weekly earnings (total pay) growth is expected to have risen by 2.0% in the three months to September.

Minutes of November Bank of England MPC Meeting

Wednesday sees the release of the minutes of the November meeting of the Bank of England's Monetary Policy Committee (MPC). At its November meeting, the MPC kept interest rates down at 0.50% and left the stock of Quantitative Easing (QE) unchanged at £200 billion (where it has been since February).

The minutes will be scanned for further clues as to the likely timing and direction of future changes in monetary policy by the central bank. At the October MPC meeting, there was a three-way split in the vote on policy with Andrew Sentance continuing to vote for a small interest rate hike from 0.50% to 0.75% while Adam Posen voted for an easing in monetary policy through a £50 billion increase in QE. The other seven MPC members voted for both unchanged interest rates and QE.

Of particular interest in the November minutes will be whether or not any MPC members moved to join Posen in voting for QE to be revived or joined Sentance in voting for a small interest rate hike.

The Bank of England's Quarterly Inflation Report for November (which was released on 10 November) indicated that central bank is currently perched on the monetary policy fence and is unsure when it will finally come down and on which side. In his press conference accompanying the release of the Inflation Report, Bank of England Governor Mervyn King revealed that the range of views within the MPC is wider than usual and that there is a "vigorous debate" between members. This reflects the major uncertainties that are seen surrounding both the growth and inflation outlooks. Mr. King further commented that there are large upside and downside risks to the inflation outlook. Mr. King concluded his opening statement by stressing that the MPC will watch all the incoming data carefully and is "ready to adjust policy in either direction in order to keep inflation on track to meet the 2.0% target in the medium term."

The Inflation Report came across as pretty balanced, with the Bank of England keeping all of its options open. The inflation forecasts certainly keep the door open for the Bank of England to re-engage in QE should growth falter markedly over the coming months as fiscal tightening increasingly bites. However, it is also clear that the Bank of England is prepared to put up interest rates modestly if the upside risks to inflation materialize.

For now at least, we see no reason to change our view that the Bank of England is most likely to keep interest rates down at 0.50% until at least late-2011. This reflects our belief that growth will slow appreciably in the first half of 2011 but that a double dip will be avoided. We currently forecast the first interest rate hike to 0.75% to come in the fourth quarter of 2011, but would not be at all surprised if any hike was delayed until 2012.

Public Finances in October

The public finances data for October (out on Thursday) are expected to show a similar shortfall to a year ago. Specifically, we expect the Public Sector Net Borrowing Requirement (PSNBR) excluding financial interventions to have come in at £10.0 billion in October compared to £10.1 billion in October 2009.

Tax receipts should benefit from the economy's improved performance in the second and third quarters of the year, while they have also been lifted this year by VAT rising back up from 15.0% to 17.5% in January. Indeed, VAT receipts were up 17.2% year-on-year in September. In addition, unemployment benefit claims have fallen by 154,700 overall from last October's 12-year high of 1.6278 million, which is helping to limit the rise in public expenditure.

A serious problem for the government though is that interest payments are increasing markedly. Indeed, the breakdown of central government expenditure shows interest payments were up to £2.3 billion in September from £912 million a year earlier— an increase of 155%. The government is highlighting this as a key reason to why there should be no delay in enacting measures to improve the public finances.

The public finances currently show modest overall improvement during fiscal year 2010/11. Specifically, the PSNBR narrowed to £73.5 billion during April-September 2010 from £77.4 billion a year earlier. Consequently, Chancellor George Osborne may still be able to meet his target PSNBR of £149 billion in 2010/11, although much will depend on how well economic growth holds up over the rest of the financial year. If current trends were replicated over the whole fiscal year, the PSNBR would come in at £148 billion in 2010/11.

Retail Sales in October

Retail sales volumes (out on Thursday) are forecast to have risen by a reasonable but unspectacular 0.3% month-on-month in October after disappointingly falling 0.2% in September and 0.7% in August. Nevertheless, this would leave retail sales volumes down 0.1% year-on-year in October. Survey evidence for October from the Confederation British Industry (CBI) was healthy, but the British Retail Consortium's (BRC) survey pointed to sluggish sales.

It is likely that retail sales will benefit to a limited extent in the final weeks of this year from consumers looking to make purchases of more expensive items ahead of the January VAT increase from 17.5% to 20.0%. Retailers will also be hoping that consumers decide to splash out and have a good Christmas despite serious economic worries and uncertainties.

While consumer spending is unlikely to collapse over the coming months, the probability is that consumers will be cautious in their spending in the face of serious headwinds. Given that consumer spending accounts for some 65% of GDP this would significantly limit the upside for overall growth. Consumer confidence is currently low while the substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets. Households already face high unemployment, muted earnings growth and elevated debt levels. On top of this, the weakness of the housing market is likely to have a dampening impact on consumer spending. Furthermore, rising food prices threaten to increasingly limit the ability of some consumers to make discretionary purchases.

CBI Industrial Trends Survey for November

The Confederation of British Industry (CBI) industrial trends survey for October (out Thursday) is expected to show that the balance of manufacturers reporting that their orders are at normal levels improved modestly to -24% in November after dipping sharply to a six-month low of -28% in October from -17% in September and a 24-month high of -14% in August.

While manufacturing output achieved decent expansion overall in the third quarter, it has nevertheless clearly lost momentum compared to the first half of the year. Manufacturers benefited earlier this year from healthier demand both at home and overseas; improved competitiveness in both domestic and foreign markets stemming from the weak pound; and a need to rebuild stocks after they were pared during the recession.

The suspicion is that manufacturing activity will be pressurized increasingly over the coming months by stock rebuilding winding down, tighter fiscal policy weighing down on domestic demand, and slower global growth hitting foreign demand for U.K. products.