UK Retail sales remain strong against a jump in inflation

March 27, 2017

Data reported last week showed that UK inflation for February jumped to 2.3% from 1.8% in January. This came as a surprise for economists who were predicting a smaller rise. While the speed of the increase may be a slight anomaly, the direction remains strongly upwards and now above the Bank of England (BOE) target of 2%. The sterling reacted positively to the news in the belief that the BOE will now have to raise interest rates more quickly than previously anticipated. However, given the driving forces of the pickup in inflation are from the increase in fuel prices and the decrease in the value of the pound, it is likely that the Bank will attempt to “look through” the data.

Retail sales posted a positive month in February, although price increases are beginning to have an impact on shoppers. While UK retail sales posted a 1.4% increase in February, 0.4% higher than economists were anticipating, volumes fell over the quarter. It is also likely that consumers are now becoming more wary about the future after receiving a boost last year with an increase in real earnings. The slowdown in spending will come as a relief to those that are concerned with the current use of debt as a way to fund increasing consumption.

Donald Trump failed to pass his health care bill last week, pulling it after conceding that he would not have enough votes. The failure is a good example of the restrictions that a US president faces when attempting to meet campaign promises. While the Republicans have control of both houses, Trump did not have the ability to build enough support. The new health care proposal was seen by some Republicans as not cutting enough and others as going too far, unsurprisingly, all Democrats opposed it. Investors now have a concern that other election promises, such as infrastructure spending and regulation reduction, will now be similarly blocked. This realisation has resulted in the worst period for US equities since the November election.

Index Open Close Change % Change
FTSE 100 7425 7336 -89 -1.20%
S&P 500 2378 2343 -35 -1.47%
Dax 12095 12064 -31 -0.26%
Cac 40 5029 5020 -9 -0.18%
Nikkei 225 19590 18985 -605 -3.09%
UK 10 Year Gilt Yield 1.248 1.19 -0.058 -4.65%

 

German and Japanese inflation data is released in Thursday and Friday respectively along with US consumer confidence on Tuesday.