Ear to the Ground

19 January 2024

This week was one providing the Bank of England with mixed messages.  Early in the week we saw wage inflation data which continued to decline on a year on year basis.  Average earnings including bonuses rose 6.5% in 3 months, year on year to November.  This was both below the previous reading of 7.2% and the  consensus forecast of 7.2%.  There were falls in both private and public sector wage inflation.  The unemployment rate meanwhile held steady at 4.2%.  The market sat up and took notice, particularly of the wage inflation, in the belief that this could support interest rate cuts by the central bank.  These are very much lagging indicators, however, being to November.

Later in the week, however, inflation surprised to the upside, this time in the form of the consumer price index (CPI).  December data was expected to show a fall in the year on year rate from the previous month but this proved not to be the case.  Year on year a rate of 4% was posted, marginally higher than the November reading and above the consensus forecast of 3.8%.  There was a pick up across many categories, but it was pleasing to see that food inflation continues to slow. 

As we wrote last week, we will have to see what impact the ongoing issues in the Red Sea, effecting passage through the Suez Canal, along with the reduction in traffic through the Panama Canal, has on goods prices moving forward.  The higher CPI figure meant that we saw a pick-up in bond yields and a sell off across UK equity markets, with interest rate cut expectations tempered.  CPI has clearly come down a long way since its highs in a relatively short period of time.  The final leg to target rate could potentially be at a slower pace.

Conversely, produce price inflation surprised to the downside, both input and output prices.  The former fell by 2.8% year on year to December, below the November reading of -2.7% and missing consensus forecast by some margin, which was -1.9%.  At the same time, output prices rose by only 0.1%, behind the consensus forecast of +0.4%.  Then Friday we saw weak retail sales data to December.  Year on year these fell 2.4%, which was against a consensus forecast for a rise of 1.1%.  Both sets of data put rate cuts back on the table.

It would appear we remain in a world where bad news is good news, with weaker economic and inflation data increasing market expectations surrounding rate cuts, which in turn they believe will support the economy.  One thing is for certain, the market does not have a very good history of forecasting interest rates, will this time be any different?  Who would want to be a policy rate setter at the moment!

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