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Friday 21st May 2021
Hi Friend,
The Saturday Economist Club Inflation Special ...
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| UK Inflation to hit 3% and soon ...
Inflation CPI basis jumped to 1.5% in April. We expect inflation to hit the 3% level within months.
CPI(g) goods inflation jumped to 1.5% from zero last month. For the moment CPI(s) service sector inflation appears to be relatively stable at 1.6%
Manufacturing output prices increased to 3.9%. Input costs increased to 9.9%. That was largely due to the hike in metal prices and the comparative jump in oil costs year on year. As we mentioned, Oil prices Brent crude averaged $18 dollars in April last year. One week in April 2020, dealers were paid $38 dollars just to roll the barrels away.
We expect the oil price comparisons to ease through to the end of the year with prices averaging $65 dollars over the period, as US oil rigs come back on stream. Check our "what next for oil prices" update. Metal prices will also ease back as output levels recover from the pandemic setback.
Should we worry about the 10% hike in manufacturing costs?
The short answer is yes. Manufacturing input costs are volatile but they do affect prices levels. The pass through ratios are roughly 50% from input prices to output prices. The pass through ratios are roughly 70% from manufacturing output prices to CPI goods. CPI(g) accounts for roughly 50% of the total CPI index. Logically the 10% hike in manufacturing costs would lead to an increase of 3.5% in goods inflation.
That's why we expect inflation to hit the 3% level in the next few months. Our CPI forecast model, a function of manufacturing output prices suggests inflation could hit the 3% level and soon. Our CPI(g) forecast model, a function of manufacturing output prices suggests consumer goods inflation could hit the 4% level and soon.
Our CPI(m) forecast model, a function of broad money supply confirms inflation could hit the 3% to 4.0% level and soon. In the US inflation already hit the 4% level last month. Fed officials have acknowledged that mounting inflation could lead to an earlier review of near-zero interest rates and the enormous bond buying program.
With inflation on the rise, the Bank of England may be forced to review the easy money policy especially if the Fed makes the move to defend the dollar. We really don't expect a move anytime yet but the increase in inflation may be sooner and less "transitory" than many expect. |
| | For the first time ever we are making available to you Friend, access to our Inflation Chart Book. This includes a selection of our working slides on inflation, manufacturing prices, oil prices and our bespoke models which underpin the forecasts. You can access the "Chart Book" here. It represents a lot of time, analysis and research. Feel free to use and share with colleagues. Access will be available to members of The Saturday Economist Club exclusively from the end of the month.
The Inflation Chart Book is just one of a series of great publications in the members library. Visit the home page, sign up today, It really is time to get serious about the Saturday Economist Club,
John
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