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Higher inflation and a recovering labour market support the case for interest rate hike in December

Date: 22nd November 2021

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK data:
  • CPI annual inflation rose to a greater-than-expected 4.2% in October, the highest rate since November 2011, partly driven by higher household fuel prices.
  • Producer prices annual inflation also rose in October. Output prices inflation increased to 8.0%, whilst input prices inflation increased to 13.0%.
  • According to official data, house prices rose by 11.8% (YOY) in September, after August’s 10.2%.
  • The labour market continues to recover with little sign of widespread redundancies after the end of the furlough scheme (end-September).
  • The number of payroll employees increased by 160,000 in October to 29.28mn, 235,000 more than in pre-pandemic February 2020.
  • Employment rose by 247,000 (QOQ) in the three months to September (2021Q3), according to Labour Force Survey data, whilst the unemployment rate eased 4.3%, down from 4.7% in 2021Q2.
  • The inactivity rate was unchanged in 2021Q3 at 21.1%, but this was 0.9 percentage points higher than in the pre-pandemic three months to February 2020.
  • Vacancies rose to record levels in the three months to October.
  • Average total pay (including bonuses) was 5.8% higher (YOY) and regular pay (excluding bonuses) was 4.9% higher (YOY) among employees in 2021Q3, though there is evidence these data are still distorted up by base effects.
  • Productivity (output per hour) slipped 1.2% (QOQ) in 2021Q3 as the rise in GVA was outstripped by the rise in hours worked.
  • Retail sales increased a greater-than-expected 0.8% (MOM) in October, possibly boosted by early Christmas trading.
  • Public sector net borrowing (PSNB) was a disappointing £18.8bn in October 2021, only £0.2bn lower than in October 2020, as debt interest payments rose to £5.6bn, compared with £1.8bn in October 2020.
  • Public sector net debt (PSND) was £2,277.6bn (95.1% of GDP) at end-October 2021, whilst the targeted underlying PSND (excluding public sector banks and the Bank of England, PSND ex BoE) was £1,986.7bn (83.0% of GDP) at end-October 2021.
Other news:
  • Bank Governor Andrew Bailey gave evidence to the Treasury Select Committee last week. He was reported as saying that he was “very uneasy” about rising inflation and he had held back from voting for a rise in borrowing costs in November because he had wanted more evidence on the post-furlough jobs market.
  • Bank Chief Economist Huw Pill, speaking at an economics conference last week, implied there was no guarantee of a December rate rise, even though the weight of evidence was shifting towards such a rise.
  • The European Commission’s Autumn forecast struck a fairly positive tone, with a modest upgrade to their 2021 GDP forecasts for both the EU19 and the EU27. However, this favourable outlook depended heavily on two factors: the evolution of the pandemic and the pace at which supply adjusted to the rapid turnaround in demand following the re-opening of the economy.
Ruth Lea said “…last week saw the usual mid-month rush of economic data. They showed a higher-than-expected jump in inflation, continued recovery in the labour market, better-than-expected retail sales and disappointing public borrowing data (boosted by higher debt interest payments). The higher inflation data and the strong labour market data, in particular, support the case for an interest rate rise (to 0.25%) in December. (The next MPC announcement is on 16 December.) But such a rise cannot, of course, be guaranteed. Even though the recent comments by Bank Governor Andrew Bailey seemed to support a December rise, the latest remarks by the Bank’s Chief Economist Huw Pill were altogether more equivocal.”

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Arbuthnot Banking Group PLC: 

Ruth Lea, Economic Adviser 
07800 608 674, 020 8346 3482 
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright 
020 7379 4415