Concerns over the spread of the new Omicron variant prompted the UK to reintroduce restrictions on travel and mask-wearing this week. Difficult decisions lie ahead for the Bank of England, which must balance a potential knock to the economic recovery with evidence of increasingly widespread cost pressures and tight labour market conditions. The odds of a rate hike at next month’s Monetary Policy Committee meeting may be receding but the jury is still out.
Rising prices are once again the hot topic, with inflation surging to 4.2% in October, ahead of expectations. Labour market data were also stronger than expected, with employment rising despite the end of furlough. Pressure is building for the Bank of England to tame rising inflation, which points towards a pre-Christmas hike next month.
We’re getting there. Last week’s GDP data showed we’re just 0.6% below the pre-pandemic peak in output. At a far less progressed stage is the climate transition. But amidst the concerns was much progress from COP26. The challenge for both the recovery and achieving net zero is to keep up the momentum in the face of multiple headwinds.
The Bank of England left interest rates unchanged last week, surprising markets which expected a hike following “will have to act” comments last month. What is going up, in contrast, are commitments around decarbonisation. And hopefully there are more to come in the second week of COP26.
The Chancellor revealed that the UK economy has turned out better than expected in recent months. Cue some meThe Chancellor revealed that the UK economy has turned out better than expected in recent months. Cue some measures to support the lower paid amidst a cost of living crisis. Welcome support that provides additional confidence around the recovery. But what about measures to support the path to net zero?
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.
Amid building global inflationary pressures came a warning from the IMF – central banks must remain vigilant. Right on cue Governor Bailey gave a very strong signal the Bank of England might raise rates as soon as December, citing increasing concerns about medium-term inflation and inflation expectations.
Surging energy costs, supply chain disruptions and labour shortages remain high up the agenda. A higher and longer version of “transitory” inflation looks to be here. Cue the inevitable squeeze on disposable incomes.
The revision to Q2 GDP indicated that the economy is closer to its pre-pandemic level of output than previously thought. So, while the list of challenges to the recovery mounts – labour, fuel and components shortages, high inflation, soaring energy prices and rising taxes – at least we know the economy faces them with good momentum.
UK inflation jumped to 3.2% while the pace of US consumer prices cooled off slightly in July. The UK’s recovery stalled in July as the Delta variant roamed. Meanwhile, job creation remained strong in August as the end of furlough approaches. The future direction of the recovery remains unclear and soaring inflation puts pressure on the Bank of England’s response (which insists that rising inflation will be transitory). Interesting to see Governor Bailey’s response this week and what they intend to do to tame inflation.
