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We have revised up our forecast for Q4 CPI inflation by 1.0pp since early July; energy prices have surged again.
But we have revised down our forecast for the level of GDP by only 0.5pp in Q4; fiscal policy will respond.
People also have shown more willingness to deplete savings; we still expect a recession to be narrowly avoided.
Households saved much less and borrowed more in Q2; real spending, therefore, likely was unchanged from Q1.
On paper, households have ample scope to reduce their saving rate further, but we see several constraints.
Some already have depleted savings, credit conditions are tightening, and deleveraging will be more attractive.
The U.K. composite PMI in July was above the 50.0 mark, in contrast to the U.S. and the Eurozone.
We think that this strength can be largely explained by the small manufacturing sector and recent fiscal policy.
Ofgem's energy price cap will rise by a further 23% in April, if the recent surge in wholesale prices is sustained.
PMI data for July show that the recovery in GDP has nearly ground to a halt and inventory is piling up.
Employment growth slowed to a 15-month low, while the pace of input and output price rises eased materially.
On balance, the latest data imply the MPC won't act "forcefully"; market pricing for August is still too high.
The headline rate of CPI inflation topped the MPC forecast in June, due to higher motor fuel and food prices.
But the core rate fell, undershooting its forecast, as retailers struggled to pass on higher producer prices.
Core CPI inflation will fall sharply early next year, when recent falls in commodity prices will feed through.
The Governor emphasised at Mansion House that the drop in the workforce has been a key driver of rate rises.
So its 0.8% 3m/3m rise in May, the largest since 1984, should ensure the MPC sticks to a 25bp hike in August.
The workforce has scope to rebound further, while vacancy and survey data imply job growth will slow.
The tax cut plans of Tory leadership contenders should be treated with a pinch of salt, given past experience.
Tax cuts won't lift GDP, if they are financed partially by spending reductions; the latter have a higher multiplier.
We doubt that even Ms. Truss would take away the BoE's independence.
We think that CPI inflation leapt to 9.4% in June, from 9.1% in May, exceeding the MPC’s 9.1% forecast.
But the upside surprise will be due to a massive rise in motor fuel prices, and another increase in food inflation.
Core inflation likely fell to 5.8%, from 5.9% in May; June 2021’s surge in goods prices likely wasn’t repeated.
The trade deficit remained extremely large by past standards in May, driven by a surge in imports.
We expect the deficit to remain huge over the rest of the year; it is on track to be the biggest since the 70s.
Tory candidates tax pledges would have to be very large in order to alter the economic outlook materially.
We think GDP held steady in May, setting up a much larger quarterly drop in Q2 than the MPC expects.
The ONS will adjust for the extra working day due to the movement of the usual late May public holiday to June.
Momentum in business services likely was offset by falls in output in the retail and hospitality sectors.
Domestic production accounts for nearly half of natural gas consumption, well above the European average.
Imports from Russia accounted for only 5% of the total; the U.K. has long-term deals with Norway and Qatar.
The bigger risk is that manufacturers are indirectly af- fected by rolling blackouts in other European countries.
Rising energy prices likely accounted for 1.6 percentage points of May's 4.9% rate of services CPI inflation.
While the jump in the VAT rate for the hospitality and recreation sector likely has lifted it by a further 0.6pp.
Underlying services inflation, therefore, only just exceeds its 2.5% average rate in the second half of the 2010s.
CPI inflation in May was 1pp higher in the U.K. than in theEurozone; Brexit hasn’t helped but isn’t the main cause.
U.K. core goods prices were depressed more by lock- downs; base effects will lower the U.K.’s rate soon.
The relative strength of U.K. services inflation is due to VAT hikes and a rise in course costs for E.U. students.
Core CPI inflation declined to 5.9% in May, from 6.2% in April, and will fall further in June.
Retailers are shrinking their margins, rather than passing on surging producer prices fully to consumers.
Faltering demand will constrain future core price rises, enabling the MPC to stop its hiking cycle this year.
Estimates of the distribution of savings can be derived by reconciling data from a few ONS surveys.
Our calculations suggest households in the top 10% of the income distribution hold 25% of the excess savings.
The current wave of rail strikes do not meaningfully increase the risk of a recession this year.
We think the headline rate of CPI inflation was stable at 9.0% in May, despite rising food and fuel inflation.
Core CPI inflation likely fell; data suggest the rise in goods prices didn’t match the big jump a year ago.
Retailers are starting to accept a squeeze on the margins, while used car prices are continuing to fall.
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