Week ahead 16 May

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Here’s a Monday morning look ahead at the data and events relating to UK manufacturing.


A bonanza of inflation data

If you are wondering how the price of a bundle of goods has changed over the past month in key developed economies this is the week to pay attention. Statistics for UK and US inflation are published tomorrow, with Eurozone inflation coming in a day later.

In the UK, CPI inflation accelerated from 0.3% in February to 0.5% in March, its highest rate for fifteen months. However, the increase in inflation was largely due to temporary factors, with an early Easter pushing through a 23% increase on air fares from February to Match, compared to a 2.7% over the same period last year.  

With price pressures remaining subdued elsewhere, we expect CPI inflation to hover around the 0.5% mark in April too. We have seen however some moderate cost pressures coming along the manufacturing supply chain, with producer prices for both input and output prices looking to have bottomed out. This is likely to reflect the recent depreciation in sterling pushing up prices for intermediate goods imports.


It’s all about wages

The condition of the labour market used to be the focal point for the Bank of England’s monetary policy decisions. However, towards the end of last year, concerns about productivity and wage growth – the main sticky points in previous Inflation Reports – gave way to risks around global growth, while now both are playing second fiddle to the uncertainty generated by the EU Referendum.

Still, when the Referendum dust settles the performance of the labour market is likely to come back into focus. It will also be easier to disentangle the recent cool down in the labour market from any Referendum-related effects. While the small pick-up in unemployment could be ‘looked through’ as the economy is close to its equilibrium unemployment rate (thought to be around 5% - currently at 5.1%), it’s perhaps the return of sluggish wage growth that will capture the attention of the Monetary Policy Committee.

After steadily creeping up to 3% during 2015, wage growth has now decelerated back to a three-month average of 1.8% in February 2016. With inflation expected to rise steadily to around 1% by the end of this year, an erosion in consumers’ real spending power – the main engine of growth in the UK economy – could be on the cards. If the growth in earnings continues to disappoint, expect wages to be a key topic of discussion in the August Inflation Report.


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