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Economics Weekly

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Focus on BoE Inflation report and CPI inflation in UK & US

Mon, Aug 11 2008, 13:04 GMT
by Nichola James

Lloyds TSB Financial Markets

The UK quarterly Inflation Report (QIR) is due this week, providing updated medium-term projections for GDP growth and CPI inflation. UK economic data features CPI inflation for July, which may hit a record high of 4.6%. Publication of eurozone GDP may show that the region's economy contracted in Q2, while recent data releases offer little prospect of recovery in Q3. In the US, headline CPI inflation may have exceeded the June high of 5%, while the University of Michigan index for August and July retail sales may show resilient current consumer spending trends.

• The BoE's Inflation Report is likely to show continued uncertainty surrounding the trajectory of growth and inflation, as well as continued deterioration in prospects for both compared with May. While we expect the Bank to have softened its view of GDP growth, it may have raised its near-term CPI inflation projections using current market implied rates. With the risk between slower GDP growth and higher inflation remaining fairly equally balanced we maintain our view that base rates will be held at 5% for the remainder of this year. In addition to the QIR, a swathe of UK price-related data are also published. Annual producer price growth exceeded 30% in June, and may be similarly high in July, as oil prices peaked at $147.27 a barrel in the month, therefore, keeping pressure on producers to pass on higher costs. Factory gate price growth may stay around 10% on an annual basis. Headline CPI inflation fears are likely to come to the fore on Tuesday, as the rate of price growth may have surged above 4% from 3.8% in June. RPI inflation could rise from 4.6% to above 5%, while RPIX could hit 5 1/2% from 4.8%, the highest recorded level for RPIX since 1992. Despite the sharp rise in the RPI inflation rate, the benchmark for wage negotiations, 3-month average wage growth is expected to remain subdued at around 3.5%, representing negative real wage growth in relation to RPI and highlighting the downside risk to UK consumer spending over the next few months.

• The key data release in the eurozone this week is Q2 GDP, which may have contracted by 0.2% on the quarter and grown by just 1.5% on an annual basis, down from +0.7% and 2.1%, respectively, in Q1. The reasons for this include retrenchment in the construction sector, which was artificially boosted by favourable weather in Q1, while in addition, exports and consumer spending growth have also slowed. July PMI surveys have come in below the 50 level, which indicates that output in the region is still contracting. Another fall in monthly industrial production in June may also be published. These prospective outcomes provide justification for the ECB keeping interest rates on hold at 4.25% rather than increasing them, even though July CPI inflation is expected to be confirmed at 4.1%, significantly higher than the ECB's 2% target.

• In the US, a worsening in June's trade deficit to -$61.0bn compared with -$59.8bn in May is widely expected as higher import costs (including oil), offset export growth. US import prices in June could accelerate further above the annual rate of 20.5% in May, keeping up pressure on domestic CPI price inflation, which may have stayed close to 5% last month. July retail sales may have strengthened, while the August University of Michigan survey may stay around last month's level of 61.2 (higher than the recent low of 56.4 in June) or even rise, due to lower oil prices, suggesting that consumer confidence is slowly recovering.

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Published on  Mon, Aug 11 2008, 13:11 GMT