Inflation in April
Data out Tuesday are expected to show annual consumer price inflation climbed to 4.2% in April, after surprisingly dipping to 4.0% in March from a 28-month high of 4.4% in February. Core consumer price inflation is seen rising to 3.3% in April after easing to 3.2% in March from 3.4% in February.
We suspect that inflation eased in March, partly because Easter occurred much earlier in April in 2010 than it did in 2011. This likely led to different timing in the seasonal rises of some prices, for example, for airfares and hotels. Furthermore, petrol prices rose further in April, while food prices also likely increased. Significantly, the year-on-year (y/y) increase in the British Retail Consortium's shop price deflator climbed to 2.5% in April from 2.4% in March, with the food-price increase rising to 4.7% from 4.0%. Nevertheless, the y/y increase in non-food prices eased to 1.2% in April from 1.5% in March. This suggests that retailers may feel under increasing pressure to price more competitively to get struggling consumers to part with their cash.
We currently forecast consumer price inflation to reach a peak of 4.7% in the third quarter. Nevertheless, the Bank of England has recently warned that consumer price inflation could well reach 5.0% because of high oil prices leading to marked increases in gas and electricity tariffs later this year. Much will clearly depend on how oil prices develop going forward, following their recent correction from their April peak levels (around USD127/barrel in the case of Brent oil). Consumer price inflation will hopefully gradually start trending lower in the final months of 2011 as the upward impact from value-added tax (VAT) developments, high energy, commodity, and food prices, and sterling's past sharp depreciation wanes. In addition, below-trend economic activity and ongoing muted wage are expected to limit underlying inflationary pressures. Inflation should dip markedly at the start of 2012 as the impact of the January 2011 VAT hike drops out. We believe there is still a realistic chance that consumer price inflation will move down to 2.0% in 2012, although the Bank of England now thinks this may be delayed until 2013.
Unemployment in April
Data on Wednesday are forecasted to show that claimant-count unemployment was flat in April. Latest data show that the number of claimant count jobless edged up by 700 in March. This took it up to 1.4505 million from a 24-month low of 1.4498 million in February. Claimant-count unemployment had previously fallen 8,500 in February and risen 3,700 in January. Overall, therefore, claimant-count unemployment fell a modest 4,100 in the first quarter of 2011 after declining 13,078 in the fourth quarter of 2010 and 1,200 in the third quarter. In contrast, the falls in claimant-count unemployment were regularly around 25,000 during February–May 2010. The claimant-count unemployment rate is expected to have remained at 4.5% for a sixth successive month in April. This is down from a 12-year high of 5.0% seen in late 2009.
The number of jobless on the International Labour Organization (ILO) measure is seen falling 17,000 in the three months to March to stand at 2.475 million, thereby keeping the ILO unemployment rate at 7.8%. ILO data are also likely to show that employment rose around 120,000 in the three months to March to stand around 29.24 million. This is largely because of a spike in the number of employed in February.
Despite the overall firmer tone of the recent labor market data, we retain the view that unemployment is headed up over the coming months. We suspect that likely below-trend growth will mean the private sector will be unable to fully compensate for the increasing job losses in the public sector that will result from the fiscal squeeze that is now really kicking in. We believe private-sector companies will become increasingly careful in their employment plans in the face of a struggling economy and elevated input costs. Specifically, we forecast unemployment on the ILO measure to rise to 2.67 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% by mid-2012.
Average Earnings in March
Underlying average earnings growth is seen little changed in March, thereby remaining very low compared with past norms. This is the consequence of relatively high unemployment, workers' job insecurity, and the ongoing need for companies to limit their costs in a challenging environment. Specifically, underlying average weekly earnings growth (regular pay excluding bonus payments) is seen only edging up to 2.3% in the three months to March from 2.2% in the three months to February. Annual average weekly earnings (total pay) growth is also expected to have been 2.3% in the three months to March, which would be up from 2.0% in the three months to February. All these rates are well below the 4.5% level that is generally considered consistent with the Bank of England's 2.0% consumer price inflation target.
Future pay developments will play a critical role in determining just how soon and how quickly the Bank of England will raise interest rates. Households' inflation expectations are currently elevated, but as long as this does not feed through to markedly higher wage growth, the Bank of England could yet hold fire on interest rates for some time to come despite current high, above-target consumer price inflation.
We expect wage growth to increase only modestly over the coming months and to remain limited compared with long-term normsdue to workers' weak bargaining position, given high and likely-to-rise unemployment. So, households' purchasing power will continue to be squeezed markedly.
Minutes of May Bank of England MPC Meeting
Wednesday's release of the minutes of the May meeting of the Bank of England's Monetary Policy Committee (MPC) will be closely scanned for any further clues as to when the central bank is likely to start raising interest rates. At its May meeting, the MPC kept interest rates down at 0.50% and left the stock of quantitative easing unchanged at GBP200 billion.
Some of the thunder of the May MPC minutes has been stolen by the recent release of the Bank of England's May Quarterly Inflation Report. Although the Bank of England significantly lowered its GDP growth projections for 2011 and 2012, it also raised its consumer price inflation forecasts, and the implication from the report was that interest rates could well start rising before the end of 2012. The Bank of England believes consumer price inflation is likely to reach 5% later this year as gas and electricity prices rise. The Bank of England also now believes that consumer price inflation may well remain above its 2.0% level through 2012.
A crucial point to note is that the bank's central forecast shows consumer price inflation around 1.9% on a two-year horizon on the market assumption that interest rates rise to 0.75% in the fourth quarter, to 1.25% by mid-2012, 1.75% by end-2012, 2.50-2.75% by end-2013, and 3.0% by mid-2012, and that the stock of quantitative easing remains at the current level of GBP200 billion. This is up from the 1.7% inflation rate expected on a two-year horizon in the February inflation report but is still in line with the 2.0% target level. The MPC would have had these inflation (and growth) forecasts available at its May meeting.
Given the higher Bank of England inflation forecasts but recent largely disappointing news on the economy, it will be very interesting to see whether or not the MPC was markedly more hawkish at its May meeting. In fact, Martin Weale, who has been voting for an interest-rate hike since January, has recently admitted that the economy has been softer than he expected. We expect the voting pattern within the MPC to have been unchanged in May with Andrew Sentance making a final vote for a 50-basis-point rise in interest rates from 0.50% to 1.00%, and Weale and Spencer Dale both continuing to favor a 25-basis-point increase from 0.50% to 0.75%. We expect the other six MPC members to continue to favor interest rates staying at 0.50%, with Adam Posen also continuing to call for the stock of quantitative easing to be increased by GBP50 billion to GBP250 billion.
It is worth noting that the dynamics with the MPC could now change significantly, as the arch-hawk Sentance left after the May meeting. Of course, it remains to be seen what stance his successor, Ben Broadbent, takes, but it seems unlikely that he will be as hawkish as Sentance has been.
Following the May Quarterly Inflation Report and Bank of England Governor Mervyn King's accompanying comments, we see no reason to change our view that the Bank of England is most likely to start raising interest rates gradually in November. We believe that the risks of the Bank of England tightening before or after November are evenly spread, with much clearly depending on how well the economy performs as the fiscal squeeze increasingly bites and whether or not wage growth shows any sign of picking up markedly in reaction to higher inflation and increased inflation expectations. Whenever interest rates do start to rise, the probability remains that they will move up relatively gradually and stay very low compared with past norms.
Retail Sales in April
Retail sales volumes (Thursday) are expected to have spiked 1.0% month-on-month (m/m) in April, having risen just 0.2% in March and fallen 0.9% in February. This would see y/y growth in retail sales volumes climb to 2.7% in April from 1.3% in March and 1.1% in February.
Retail sales are expected to have been lifted appreciably in April by a pretty powerful combination of factors: the later Easter this year, much-improved weather, and the royal wedding. Survey evidence from the British Retail Consortium (BRC), in particular, and the Confederation of British Industry (CBI) suggest that this was the case.
While welcome, any spike in retail sales in April should not be taken as a sign that the consumer is roaring back to life. What it would suggest is that pressurized consumers need a particularly favorable set of circumstances to part with their cash. We suspect consumers are likely to keep a tight grip on their purse strings over the coming months.
The underlying impression remains that consumers have become significantly less willing, and able, to spend in recent months in the face of serious headwinds. Consumers' purchasing power is currently being squeezed hard by high inflation in tandem with ongoing muted wage growth. Concerns over jobs, the economy, and fiscal tightening increasingly kicking in from April (for example, employees' national insurance contributions have risen) are also clearly weighing down on consumer confidence and willingness to spend. In addition, the weak housing market has adverse repercussions for consumer spending (healthy housing market activity boosts demand for carpets, fittings, and furnishings as well as major household appliances while rising house prices can have a significant wealth effect).
Furthermore, many consumers are likely worried that the Bank of England will start to raise interest rates in the second half of 2011.Even if the Bank of England only edges interest rates up, it will affect consumer psychology as people are bound to see the move as the first in a series of hikes. Reflecting these concerns, the GfK NOP consumer confidence index fell appreciably to a 26-month low in April, with consumers' less willing to make major purchases.
CBI Industrial Trends Survey for May
We expect the CBI industrial trends survey for May (Thursday) to add to the recent evidence that the manufacturing sector is losing some momentum after seeing strong growth through 2010 and the start of 2011. Specifically, we forecast the balance of manufacturers reporting that their orders are at normal levels to have edged back further to -12% in May after retreating to -11% in April from a three-year high of +5% in March. Even so, this would still be above the balance's long-term average of -18%.
Latest hard data and survey evidence for the manufacturing sector have been softer overall, and there is significant concern that companies will find life increasingly challenging over the coming months as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand. While global economic activity currently looks decent, there is the risk that it could be hit by high oil prices. Furthermore, high oil prices and elevated input costs are a serious problem for UK manufacturers by substantially squeezing their margins and putting pressure on them to raise prices and risk losing business. There is also the ongoing risk that recurrent sovereign debt problems in the Eurozone could dampen orders from key UK overseas markets. Meanwhile, problems in Japan could also hurt manufacturing activity by causing supply-chain disruptions. This is particularly a potential problem for the auto and consumer electronics sectors.
17 May - Consumer Price Inflation, April (Month-on-Month): +0.8%
17 May - Consumer Price Inflation, April (Year-on-Year): +4.2%
17 May - Core Consumer Price Inflation (ex Food, Drink, Tobacco), April (Year-on-Year): +3.3%
17 May - Retail Price Inflation, April (Month-on-Month): +1.0%
17 May - Retail Price Inflation, April (Year-on-Year): +5.4%
17 May - Underlying Retail Price Inflation, April (Month-on-Month): +1.0%
17 May - Underlying Retail Price Inflation, April (Year-on-Year): +5.4%
18 May - Claimant-Count Unemployment Rate, April (%): 4.5%
18 May - Claimant-Count Unemployment Change, April (000s): 0
18 May - International Labour Organization Unemployment Rate, March (%): 7.8%
18 May - Average Weekly Earnings - total pay, March (3-Month/Year): +2.3%
18 May - Average Weekly Earnings - regular pay excluding bonus, March (3-Month/Year): +2.3%
18 May - Bank of England Monetary Policy Committee interest-rate vote split, May (Hike-Unchanged-Cut): 3-6-0
18 May - Bank of England Monetary Policy Committee Quantitative Easing vote split, May (More-Unchanged-Reduced): 1-8-0
19 May - Retail Sales, April (Month-on-Month): +1.0%
19 May - Retail Sales, April (Year-on-Year): +2.7%
19 May - CBI Industrial Trends, Total Orders, May: -12%