It was another busy week for observers of the UK economy with a fresh batch of data released giving policymakers at the Bank of England plenty to think about.
Like a gambler holding 15 on a blackjack table, Threadneedle Street’s next move on interest rates is a gamble either way: cut too fast and risk letting inflation bed in – cut too slowly and strange the economy’s rebound from recession.
But what happened?
Stubborn wage growth of around six per cent raised the spectre of persistent inflation, but a range of other indicators suggested the labour market is finally loosening which should contribute to easing pay pressures in the months ahead.
Inflation came in ahead of expectations at 3.2 per cent in March, on the back of strong services inflation, which came in at six per cent. Services inflation is the Bank’s preferred gauge of domestic price pressures.
Andrew Bailey said the UK remained “on track” despite the slight upside surprises on inflation and wage growth. The more hawkish Megan Greene however said interest rate cuts were “not imminent” after the latest figures.
Retail sales underwhelmed in March, remaining flat on the quarter before. Deloitte suggested that consumer confidence was on the up, but this has yet to transfer into higher spending.
Most of this week has been dominated by discussions about when the Bank of England will start cutting interest rates.
Following the hot wage and inflation figures, economists pushed back the timing of the first rate cut, with August looking the most likely date. Money markets are more pessimistic and have not fully priced in the first cut until September.
This seems like a fair judgement. The figures showed that inflationary pressures were more elevated than expected, even if not drastically so.
As Ian Stewart, chief economist at Deloitte, said: “Inflation is in retreat but the Bank of England cannot yet be sure that it is beaten”.
“With earnings growing at close to 6.0 per cent, and the economy reviving, the Bank will be in no hurry to cut interest rates,” he added.
The prospect of stubborn inflation raises unwelcome comparisons with the US, where the headline rate of inflation has been stuck around three per cent since last summer.
Markets now doubt that the Fed will be able to cut rates this summer owing to the strength of the economy. But looking at the latest retail sales from both sides of the Atlantic shows a crucial difference between the two economies.
Figures out earlier this week showed US retail sales rose 0.7 per cent month-on-month, comfortably ahead of analyst expectations. “Official data suggests the US is booming,” James Knightley, chief international economist at ING noted.
Compare that with March retail sales in the UK, which were released this morning. Sales volumes were flat after a 0.1 per cent increase in February.
Admittedly, the figures for the first quarter as a whole were much healthier, showing a 1.9 per cent expansion largely thanks to a blockbuster January. But it hardly seems likely that domestic economic momentum will contribute to a resurgence in inflation.
Alex Kerr, assistant economist at Capital Economics said the Bank of England is less likely to be worried about “the possibility of a US-style resurgence in GDP growth and stalling in disinflation.”