Inflation predicted to rise, outstripping wage growth

February 21, 2017

UK inflation figures released last week showed that prices have been increasing at their fastest rate in two and a half years. Annual Consumer Price Inflation (CPI) increased to 1.8% last month, from 1.6% in December. While the rate is lower than predicted, the headline figure is now rapidly approaching the Bank of England’s 2% target. It is widely expected to exceed 2% and approach 3% by the end of 2017, as a result of a weak sterling and higher oil prices. However, for the time being, wage growth continue to outstrip inflation, increasing at an annual rate of 2.6% in the final three months of 2016 and the jobless rate is holding steady at 4.8%, helped by a record level of employment.

 

Accelerating inflation and slowing wage growth appears to have finally had an impact on retail sales. Low-interest rates and real wage growth have driven consumer spending over the last year, helping the UK economy during a period of increasing uncertainty. However, policymakers are now hoping that manufacturing and exports are now able to take the baton from the consumer. Although, given the relative sizes of these parts of the economy, it may be a significant challenge. A weaker currency is likely to accelerate the change in the balance of the economy.

 

GDP growth in emerging market economies has accelerated following several years of an unusually low rate of expansion. Although President Trump is widely assumed to be bad for emerging market economies, higher commodity prices and increasing exports helped many economies grow. Interestingly, China saw a significant increase in the level of imports, increasing by 16.7% last month. This is far more than the 7.9% growth in exports and indicates that the country is gearing up for additional production or more likely, increasing consumer demand. A continuing move of the Chinese economy away from exports and production towards consumption will be a significant positive for the global economy.

 

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UK 10 Year Gilt Yield 1.275 1.225 -0.05 -3.92%

 

German and French GDP figures are released this week along with US home sales figures.