Governor King to play down inflation threat

By Jeavon Lolay, (Senior Global Macroeconomist, Mark Miller (Global Macroeconomist), George Johns (UK Macroeconomist), Corporate Markets

Following on from a dovish Quarterly Inflation Report (QIR), attention in the UK will shift this week to the details of the February MPC minutes (Wednesday). Although the tone of the minutes are likely to echo key the messages emanating from the report – chiefly, that should the evolution of the recovery disappoint, a renewed dose of quantitative easing will be implemented – the vote will also be of interest. We expect a three-way split to have emerged on the MPC, with three members favouring an extension to the Asset Purchase Facility, a majority of five voting for no-change and one voting for a reduction.

Turning to UK data flow, we expect a 0.1% monthly decline in the CPI for January (Tuesday), pushing the headline annual rate of inflation up by six percentage points (pp), to 3.5%.

A reading above 3% will prompt a letter from Governor King to the Chancellor, explaining why inflation is more than 1 pp above the 2% target and how the MPC envisages a moderation in inflation occuring. We forecast a 2k decline in the January claimant count, while the headline measure of average weekly earnings is expected to rise by two-tenths to 0.9% in the three months to December, versus a year earlier.

Nonetheless, that would be a very weak outturn compared to the long-run average of 3.8%. Indeed, weak income growth is likely to bear down on consumption and in January, the combination of inclement weather and price rises linked to VAT increase are likely to have pushed retail sales volumes (Friday) 1% down in the month.

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* All charts are sourced to Lloyds TSB Corporate Markets Economic Research, Bloomberg, IMF and Datastream

 


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