The British economy has been witnessing improvement recently, yet prices are still facing downside pressure since the worst economic recession since WWII is weighing on the economy.
CPI dropped in September to the lowest level in 5 years to 1.1% from 1.6% in August. The drop in commodity prices dragged prices to the downside where there are many firms and retailers suffering from decline in their sales. For instance, Sainsbury Plc, the third-largest supermarket in the U.K., posted decline in sales in October.
On the other hand, firms are shedding jobs to reduce costs which is reducing consumers' income and thereby their affecting spending and prices. ILO Unemployment for the 3 months ending August is 7.9% increasing by 88,000 to 2.47 million people. Alliance & Leicester cut 200 jobs across two Leicester sites in the United Kingdom.
However, the data released today shows improvement as PPI output rose to 1.7% from 0.4%, but it retreated to 0.2% from 0.5% on the month. PPI input inclined to 0.1% from -6.2%, and 2.6% from -0.2% on the month. PPI core output inclined to 2.0% from 1.3%, but slid to 0.3% from 0.2% on the month.
Eyes will be on the inflation report for November which will appraise the current economic conditions and expectations for inflation. The bank expects inflation in the near term to climb above 2%, where it predicted previously to reach 0.4% this year and 1.5% next year.
Energy prices after reaching its bottom in February below $34 a barrel, it surged to one-year high in October above $81 a barrel which participated in raising inflation estimates for October's reading.
Yesterday, the BoE kept the interest rate unchanged at its low level at 0.5% and increased the asset purchase facility at a slower rate by 25 billion pounds to 200 billion pounds while markets were anticipating 50 billion pounds rise. The program is going to continue for another three months
The central bank believes that keeping interest steady is the only optimal solution since they rely on the asset purchase facility to boost the economy, especially after the economy had shown progress starting from the second quarter as the contraction eased to 0.6% from the severe first quarter contraction of 2.4%, the worst since 1958, while reaching 0.4% in the third quarter.
The European Commission reiterated its forecasts for the U.K. growth in 2009 to 4.6% contraction instead of 4.3% announced in July, while it anticipates the economy to expand in the fourth quarter to 0.4%, higher than the prior estimates of 0.2% contraction. With regard to the British government, it predicts growth in the last quarter of the year and a contraction between 3.25% and 3.75% for the current year as a whole.
Meanwhile, world central banks are unwinding their stimulus measures in the coming period and adopt tightening monetary tools to avert future inflation. However, assistance to banks is continuing as there are many banks still vulnerable to bankruptcy. Royal Bank of Scotland and Lloyds Bank will receive 40 billion pounds bailout from the government.
