Last week we heard conflicting opinions from the Bank of England on the outlook for inflation and interest rates. And the latest data releases provide little clarity to the conundrum. On the one hand, the economic gains that enabled the MPC to hike rates in March seem to be slowing, as seen in business surveys and consumer spending. On the other, inflation is still the main concern for firms.
Dovish. Since the banking sector turmoil began, markets have assumed less need for further monetary policy tightening. MPC member Silvana Tenreyro agrees. Even before tightening of financial conditions, she saw inflation quickly retreating in light of rapidly falling energy prices, unwinding of supply chain disruptions and cooling of wage growth pressures. As a result, she thinks that rates are already in the restrictive territory and will need to be cut sharply to avoid an inflation undershoot.
Hawkish. However, BoE Chief Economist Huw Pill is not in the same camp. While headline inflation is falling, he still isn’t discounting the possibility of persistently elevated inflation, with still tight labour market and firms’ pricing power being the main risk factors. The policy response remains tricky, given the unprecedented inflation situation and the famous ‘long and variable lag’ of monetary policy effects, but he would like monetary policy to ‘see the job through.’ He did stress that the risks of a tightening in financial conditions and dislocation of credit markets will be important factors, especially to the extent they affect the outlook for inflation. The upshot? The game is still on.
Gainin’ from trainin’. While the labour market so far has demonstrated resilience, the decline in skills and training is a long-term challenge that drag on productivity. In a recent study the Resolution Foundation finds that the decline in training since the 2000s has been driven by higher-paid workers, who back in 2003 were 2.4 times as likely as low-paid workers to receive training. But by 2022 this gap had narrowed to 1.6 times. And while low-paid workers are consistently less likely to be trained, a rising National Minimum Wage (NWM) should, at least in principle, give employers greater incentive to train those at the wage floor and increase their productivity in line with their higher wages. But the important question is: will they do it?
Softening. Fast moving data on consumer spending echoed the moderation in the business surveys seen over March. CHAPS card spend data shows a 3% rise in overall spending, slower than the impressive gains seen in February. More worryingly, there was a renewed decline in spend on delayables, a measure of the risk appetite of the households. Revolut debit card data echoed the softness in spending, with the largest decline in spending on entertainment. Meanwhile, growth in job openings slowed over March. The enly exception was the 21% rise in part time positions, speaking to a softening in labour market.
Thinly sliced. Over half of us (55%) have cut back on non-essential spending this year in response to cost-of-living pressures. Not the biggest surprise. But a KPMG survey provides insight into how households have changed their behaviour and how they’re likely to react to this month’s widespread rise in mobile and broadband plans. Around a third have been substituting for cheaper brands, both product and store. While a similar proportion are using promotions or lowering their standard of living by buying less. And a similar share again are dipping into their savings.
Laggard: Business conditions also continue to remain challenging, but estimates show small signs of improvement for some measures. For example, a fewer share of businesses reported energy prices as their top concern in April (17%) compared to January (21.6%). Supply chain disruptions are also seemingly easing. In Feb, 67.3% of businesses were able to obtain the materials they needed, up from 61.5% in January. However, industrial action continues to pose operational challenges for many businesses, including worker shortages. Granted, although 28% of businesses are facing worker shortages, this has fallen gradually from 36% in late-August 2022.
Happy New Tax Year! The UK is emerging from the dual shock of pandemic and energy market disruption with historically high public debt, increased cost of servicing it and a cost-of living crisis. In response to that the tax as a share of GDP will increase from 33% in 2019-20 to around 37% in 2023-24, and targeted payments will support vulnerable households. The biggest tax increases will come in the form of personal allowance and income tax thresholds freezes until 2027-28. Overall, according to calculations by the Resolution Foundation, new tax and benefit policies are progressive.
Cooling underway. US economy started to show signs of cooling in the jobs market suggesting that a year-long tightening is starting to weigh on its resilient labour market. In March, employers added 236k jobs, the smallest gain since December 2020. The UNP rate dipped to 3.5% from 3.6% in Feb, and for the first time in two years vacancies fell below 10m, suggesting that hiring is losing momentum. Wage growth, while still strong, rose by 4.2% YoY, the lowest since mid-2021. Whether the loosening is fast enough for the Fed to end its tightening soon remains to be seen. What is certain however, is that the resulting tightening in credit conditions, following the banking turmoil, would work in the same direction as rate tightening.