This is a big week for UK data. Headline inflation is set to fall from just under 8.0% to 6.7% or 6.8%. That’s a big fall and very welcome. But core inflation probably won’t fall much, if at all, and labour market data are likely to show wage inflation staying high and probably increasing on the three-month annualised figure that the Bank of England (BoE) focus on.
So why do I think the labour market is weakening and this will encourage the BoE to stop hiking rates? First, it is important to recognise that employment and unemployment are measured in a curious way in the UK. There are three separate cohorts, measured a month apart, that make up the figures. Looking at these individual series, there is a strong possibility that unemployment jumps towards 4.5%, not this month but next month. That would be important because it would be above the level the BoE reckons is sufficient to put downward pressure on wages. That would mean that all the rate hikes, have done their job. We also think that annualised wage inflation over the last three months is misleading because the figures would include the 10% increase in the minimum wage in April. And that is clearly a one-off.
There are clear signs that the surge in wage inflation is behind us. Employment is slowing, labour supply is rising, with higher unemployment the inevitable consequence.
There’s a long way to go on this. The BoE have signalled that they plan to keep rates high for an extended period. But the message from our reading of the data is that rates have peaked or are within 25 bps of the peak.
Looking further ahead, we see inflation falling significantly. Yes, there are some factors pushing prices up such as the recent rise in oil prices and the planned 20% hike in car insurance premiums. But the impact of last year’s sterling weakness is fading to be replaced by the favourable impact of recent sterling strength. And as headline inflation falls and the labour market weakens, wage inflation should begin clearly to ease.
Mortgage rates have already fallen back from their highs and there is something of a price war going on across lenders. Good news for borrowers, especially those re-setting into much higher rates.
Last week we learned that the UK economy was a bit stronger than expected and most forecasters have now abandoned their calls for a recession. Growth is certainly not robust but it is in positive territory. July retail sales are likely to have fallen back after June’s surge, but that’s weather related and temporary. All in all, the economy is looking better.
We shall see if this week’s figures come in line with my forecast but the general picture as I see it is of an improving economy with falling inflation and reasonable economic growth.
