Week Ahead: how hot will UK inflation run this month?

Inflation’s the name of the game once more this week. UK CPI data takes focus – will a hot print force the Bank of England to raise rates in December? We also get a look at CPI numbers from Canada plus the latest retail stats for the United States in the build-up to holiday spending season. 

UK inflation under the spotlight with latest CPI data  

Aah inflation. The dog that bites. For pretty much all major economies, the road to post-pandemic recovery has been paved with higher prices across seemingly all areas of society. 

Here, we are focused on the costs of consumer goods. The UK shares the Consumer Price Index numbers for October on Wednesday morning. 

So, what’s in store for the UK? High consumer goods price inflation most likely if September’s readings are anything to go by. We’re well above the Bank of England’s 2% target. September’s data, published in October, showed a second straight monthly year-on-year rise in CPI, increasing by 3.1%. 

There may be some reasons to be cheerful, or at least not wholly pessimistic. On a monthly basis, CPI clocked in at 0.3%. That’s a drop from August’s 0.7% increase.  

Moving in the right direction then? Not according to the British Chamber of Commerce. The retail group has said these are “temporary distortions” and don’t reflect the reality on the ground. 

Indeed. Fuel prices, for example, are skyrocketing, driven partly by media-spun panic buying earlier the autumn, but also high crude oil prices. Cost of fuel in the UK rose 12% in October, according to Office of National Statistics data. 

Will another high CPI print toughen the Bank of England doves into hawks? Our Chief Market Analyst Neil Wilson has previously delved deep into the BoE Monetary Policy Council’s (MPC) thinking as regards its rate hiking intentions.  

Certainly, Governor Andrew Bailey has been sending mixed signals. Markets had priced in a rate hike at November’s MPC meeting, based on months of Bailey comments about using their tools and fighting inflation. Come the November BoE press conference and, lo and behold! No hike. Thanks Andrew. 

The reality is that consumer goods and the cost of living is rising at a rapid pace in the UK. Something will have to give and give soon. 

The data will be viewed as a key driver for sterling as it’s likely to be a major factor at the BoE’s December meeting, when many expect policymakers will raise rates. 

Canada’s CPI data to also put pressure on central bank 

Across the Atlantic, hot inflation prints have provided a bit of a wakeup call to the Bank of Canada. 

 Rising CPI numbers pushed inflation to an 18-year high in September, according to last month’s print. We’ll now be looking at the reaction to October’s numbers which are released on Wednesday. 

Annual inflation, as measured in CPI, hit 4.4% in September, ahead of 4.3% estimated by analysts. That’s the fastest rate since February 2003, according to Statistics Canada. Not only that but it’s also the sixth month in a row inflation has beaten the BoC’s 1-3% control range.  

Like the UK, much of this was driven by rising costs of fuel, energy, and food. Unlike the UK, however, the Bank of Canada appears to have actually been spurred into action. 

The Bank of Canada is already scaling back its QE programme. But off the back of higher inflation, it appears Governor Macklem and co are lining up a rate hike as early as April 2022.  

Will this be the catalyst to bring prices down? Maybe. Maybe not. According to Macklem, high inflation might be in place across the rest of 2022. High energy prices and supply bottlenecks, the same demons the world is wrangling with in general, will likely remain in place. 

Is another US retail sales beat on the cards? 

US retail sales are on a bit of a hot streak at the moment – although the value increase is potentially down to the fact the costs of consumer goods is increasing.  

Looking at the raw data, September showed a 0.7% monthly increase, versus 0.2% expected. This follows on from the 0.9% increase shown in August, when markets were expecting a drop of 0.7%. 

It seems COVID-19 can’t slow down the spending. This is good news. Higher prices or not (October’s CPI data showed a searing 6.2% rise), the stats show American shoppers are willing to spend their hard-earned cash. This can help put the US on a good footing in the fourth quarter. 

The outlooks are also good for the holiday season. We’re heading into the Thanksgiving/Christmas spending corridor. The National Retail Foundation projections say spending across these two intense shopping periods will jump between 8.5% to 10.5% higher than 2020’s levels – roughly $843.4 billion to $859 billion. 

Not bad going if annual sales exceed the GDP of most countries worldwide. 

Sticking with the National Retail Foundation, the group believes the US is also on course for bumper import levels of retail goods in 2021. That’s despite supply and logistics bottlenecks thrown up by the global pandemic.  

The retail trade organization says that while container import levels are down versus a year ago, they remain strong and are on track for a projected 18% overall increase in 2021. 

But this is all getting ahead of ourselves. We still need to see October’s data first.   

Earnings season winds down 

It’s nearly a wrap on another earnings season.  

Third quarter earnings have been coming thick and fast for the past couple of weeks. Not many notable megacaps are yet to report in. So far, we’ve seen Wall Street-beating reports from the likes of Apple, Tesla, and Google-parent Alphabet. 

Wal-Mart, Nvidia, and Cisco are the big names reporting this week.  

Major economic data 

Key earnings data