Economic Perspectives –
The CPI inflation rate jumps in August, but MPC still expected to see higher inflation as temporary
The latest Perspective from Ruth Lea CBE, Economic Adviser to Arbuthnot Banking Group.
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK data:
- CPI rate increased to 3.2% (YOY) in August, compared with July’s 2.0%, partly reflecting higher transport costs (including fuel and second-hand cars).
- The ONS said the change in the CPI inflation rate between July and August partly reflected base effects. In August 2020 the Eat Out to Help Out scheme and a cut in the VAT rate for the hospitality sector pushed prices down. Prices in catering services fell 5.8% (MOM) in August 2020, compared with a 0.2% (MOM) rise in August 2021.
- Increases in producer prices inflation suggest further inflationary pressures in the pipeline. Output prices annual inflation rose to 5.9% in August (5.1% in July), whilst input prices annual inflation rose to 11.0% in August (10.4% in July).
- The labour market continues to recover. Payroll employees increased by 241,000 in August to 29.1mn, returning to pre-coronavirus pandemic (February 2020) levels.
- Employment (LFS data) increased in the three months to July, whilst unemployment fell; the unemployment rate fell to 4.6%.
- There were 8.370mn inactive people (16-64 years) in the three months to February 2020 (pre-pandemic), compared with 8.711mn in the three months to July, indicating there are still around 350,000 more inactive people (16-64 years) than pre-pandemic. If people aged 65+ are included, there are currently over 600,000 more inactive people than pre-pandemic.
- Vacancies rose to over 1 million in the three months to August, a record.
- Annual average earnings inflation remains elevated. It was 8.3% for total pay (including bonuses) and 6.8% for regular pay (excluding bonuses) in the three months to July 2021. The ONS estimated that the “underlying” regular earnings growth rate, allowing for base effects, was 3.6%-5.1%, compare with the 6.8% unadjusted figure.
- The ONS reported that house prices fell by 3.7% (MOM) on a non-seasonally adjusted basis in July and by 4.4% (MOM) on a seasonally adjusted basis, after the tapering of the stamp duty holiday. In annual terms they rose by 8.0% in July 2021, down from 13.1% in June.
- Retail sales volumes fell by 0.9% (MOM) in August, the fourth consecutive month, but they were still 4.6% higher than in pre-pandemic February 2020.
Central Bank news:
- The MPC meets this week and interest will focus on two issues. The first is whether the MPC will modify its assessment that higher inflation is “transitory”, in the light of the latest inflationary pressures. The second is whether the new Chief Economist Huw Pill (and possibly others) will vote to rein in QE. Michael Saunders was the only MPC member to support reining in QE in August.
- The Fed also meets this week. Interest will focus on the tapering update, with some expectations that the Fed may announce a date when tapering could begin.
UK political news:
- The Prime Minister reshuffled his Cabinet last week. Rishi Sunak remained the Chancellor of the Exchequer.
- It has been announced that there will be further delays in imposing checks on, firstly, specified goods imports from the EU and, secondly, specified goods sent from GB to NI.
- The Government announced its “new plans to capitalise on the freedoms from Brexit”.
Ruth Lea said “It is widely expected that CPI inflation will pick up further in forthcoming months, not least because of higher household energy bills and the increase in the VAT rate for the hospitality sector. And a recent pick-up in producer prices inflation suggests other inflationary pressures in the pipeline. The Bank has, of course, forecast that inflation will increase to 4% in 2021Q4 before falling back and returning to close to the 2% target in the medium term. At this week’s MPC meeting interest will focus this week on whether the MPC maintains its stance that the uplift in inflation is “transitory”, given the latest developments. On balance, we expect that it will, but clearly there are dangers that higher inflation will become imbedded.”
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