Chief Economist’s Weekly Briefing – More to come

Inflation remains firmly in focus as we move deeper into Autumn. September saw a slight softening in price pressures. But it’s a pause before a re-acceleration as higher energy prices bite. In the longer-term, electric vehicles and a decarbonised power system are important remedies. So they are welcome pledges in the government’s Net Zero Strategy.

Respite. Inflation eased from 3.2% y/y in August to 3.1% y/y last month. The restaurant and hotel sector was the only category pulling the overall inflation figure downwards. And that was due to some base effects from last year’s “Eat Out to Help Out” scheme. There are energy and Covid-disruption inspired price pressures – petrol and second-hand car prices have already topped 19% y/y. Food price inflation is building too, with more to come. But domestically generated inflation pressure remain muted, for now at least. And pay settlements remain around the 2% rise mark. Important points in the ‘transitory persistent’ inflation debate. In the short-term, at the headline level, the only way is up. Given the surge in energy prices in October the ascent towards 4% and beyond will resume in next month’s data.  

Plan, at last! Back in pre-Covid 2019 the UK was the first country to set itself a legally binding commitment of reaching net zero emissions by 2050. This week, the UK government has published its Net Zero Strategy: Build Back Greener. In outlines sector specific targets and policies for keeping us on track for coming carbon budgets. Among other things it sets out commitments or “ambitions” to end the sale of combustion-engine cars and vans by 2030, end gas boiler sales and have a fully decarbonised power system by 2035. There are still question marks over whether it is sufficient, but the fact that the UK has a detailed plan for net-zero is a significant development.

Pulling tight. Retail sales volumes fell 0.2% in September, the fifth straight monthly slide. One area that’s seen a sharp switch in spending habits in recent months is household goods stores. Back in May they were 30% above pre-Covid levels, they’re now marginally below, having fallen 9% last month. We’ve had our fill of doing up our homes it seems. Meanwhile those who felt compelled to panic-buy petrol last month helped drive a 2.9% rise in auto fuel sales. In the meantime, falling consumer confidence, as suggested by the GfK index, and rising COVID-19 infections suggests sluggishness could persist. Although anecdotal reports of some preemptive Christmas shopping over shortage fears might mean a better October at least.

Still healthy. Some had expected a cool down in the housing market once the stamp-duty-holiday ended in June. Instead, after a calm July, August again saw rising house prices and activity levels. The annual price increase jumped to 10.6%, compared to 8.5% in July. Transactions also returned to pre-Covid level of c 100k from July low of c. 75k. Scotland, at 16.5% annual price growth, was the regional leader while London remained the laggard. That hasn’t made it easier to buy property in London though. Average prices in London increased by more than 25k just over the last month, more than the UK average price increase over the full year!

The new socials. Aggregate credit and debit card purchases through October so far point to a rebound from September, with a good deal more spending on ‘social’ categories. UK restaurant reservations remain a healthy 20% above pre-pandemic levels. But London, where they’re only 86% of pre-pandemic levels, continues to lag. Meanwhile, almost one in six businesses intend to use increased homeworking as a permanent business model going forward. Staff well-being, reduced overheads and increased productivity are all cited as reasons.

Inflation 4.0. Eurozone inflation accelerated for the third month running in September and at 3.4% y/y hit a 13-year-high. Soaring energy prices have fuelled the recent inflationary surge and there is no sign of any let up on this front. We can expect the Eurozone’s 4.1% y/y inflation peak (July 2008) to be eclipsed in the months ahead. But energy prices aren’t the only culprit. Stripping out volatile components such as energy and food reveals that ‘Core’ CPI is increasing too, jumping to 1.9% y/y up from 1.6% y/ y in August, marking the highest rate since March 2008. The need for ECB policy action is drawing nearer.

Mixed. The Euro area composite PMI dipped to 56.2 in October 2021, from 54.3 in September 2021, the lowest level since April 2021. Weakness was evident in manufacturing and services. In contrast, the US composite PMI index increased to 57.3 in October 2021 compared to 55 in September 2021 with services faring better than manufacturing. A common theme in the US and the Euro area are supply-side bottlenecks and labour shortages. As a result, cost pressures are increasing, feeding through to higher prices. Witness the record number of companies increasing consumer prices in the Euro area in October 2021. Ongoing demand/supply imbalances increase the risk higher inflation will prove more persistent particularly in the US.  

Dragon down. What do you get when you combine an outbreak of coronavirus, power shortages and efforts to institute major reforms in key industries?  Answer: a marked slowdown in GDP growth. China’s economy grew a mere 0.2% between the second and third quarters. The figures are better when compared to the previous year, with the economy 4.% larger. But for the aforementioned reasons China’s looking at a challenging period in coming months.

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