Hi Friend, Lots of economic data to add to the mix this week. Retail sales bounced back in May from a disappointing April. Month on month, sales volumes increased by 2.9% following a fall of 1.8% prior month. Year on year sales were up just 1.3% in volume terms, up 2.2% in value. The ONS warns data may have been affected by the extra bank holiday for the coronation of King Charles III.
If so, the loyal subjects were not drinking much, alcohol sales were down by 11.5%. Flag waving appeared to boost textile sales by 16.5%, footwear sales were up by 15%, cosmetic sales were up 11% and making music was up by 18%. We don't usually comment on the retail sales figures. I fear they are suffering from "Long Covid". Lies, damn lies and statistical adjustments part of the problem.
Public Sector Finances ... The last update on Public Sector finances before the general election was released yesterday. Net debt edged up to £2.7 trillion pounds, that's 99.8% of GDP. Borrowing in the merry month of May, was £15 billion pounds. £33.4 billion for the first two months of the year, compared to £33.0 billion in the first two months last year. Borrowing is on track for another £120 billion this financial year, unless fortunes change for the new administration.
Inflation Hits Target ... Consumer price inflation, CPI basis, hit the 2% target in May down from 2.3% in April. Goods inflation fell from minus 0.8% to minus 1.3%. Service sector inflation eased from 5.9% to 5.7%. Core inflation (excluding energy, food, alcohol and tobacco) increased by 3.5%.
CPI inflation was expected to fall to target
2.0% in the second quarter, according to forecasts from the OBR and The
Bank of England. The 2% target is not expected to hold.
The Bank is concerned about the high level of service sector inflation and the high level of wage settlements. Producer prices appear to have "bottomed out". Our money supply model has also flagged the turn. The inflation arithmetic (goods and services) was 2.2% in the month.
Inflation may have touched target in the second quarter. It's more of a "touch and go". Just like an aircraft, touching down on the tarmac and immediately taking off again. The Bank expects CPI inflation to increase and to average 2.5% in the
final quarter.
Despite the headline inflation rate hitting the target, the Bank
of England decided to keep interest rates on hold at 5.25%,
reflecting ongoing concerns about persistent inflation in the services
sector and the broader economy.
"Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates."
Analysts are divided on the timing of potential rate cuts, with some
expecting reductions as early as August, while others anticipate delays
until later in the year. For the
moment, our overall forward guidance outlook is changing. We
expect a series of two base rate cuts in the current year possibly
beginning in August. We model base rates at 4.5% in the final quarter or possibly Q1 2025, but not much more to follow in 2025.
But then again, don't bet on it ..
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