In the UK a heavy data calendar will address different aspects of the economy over the coming week. Retail sales on Thursday look set to be modestly softer as Olympic fever replaced shoppers’ appetites. The public finances look set to post their first annual improvement of the year in August, but even then the expected £10bn deterioration in the underlying finances will maintain the focus on the finances ahead of the Autumn Statement. But inflation will be our focus. Lloyds TSB expect August’s CPI inflation to ease back to 2.5%. Although a much sharper drop is likely the following month, the outlook for yearend is firming with rising oil and commodity prices increases and expectations of further utility tariff hikes. Separately, this week sees announcements on possible methodological changes to RPI inflation, which could have a material impact on the longer-term outlook. September’s MPC minutes will provide the latest insight into the Committee’s thinking. The firming of inflation pressure towards year-end will raise questions of continued QE beyond the current programme. It remains to be seen if the Committee will follow the Fed when it comes to supporting a sub-par recovery.
Inflation picked up to 2.6% in July as the earlier summer sales resulted in less clothing discounting. In August we forecast a modest softening in inflation to 2.5%, in part reflecting a base effect from the start of last year’s utility tariff hikes and our expectation of softness in some retailing prices including clothing and furniture. Inflation looks set to continue to soften towards year-end, with September’s reading likely to drop sharply as energy price increases coincided in this month last year. However, the question of whether inflation will fall below 2% by year-end now looks like a close call. Global oil and food price increases and a renewed round of domestic utility tariff rises all threaten upward pressure on inflation and Lloyds TSB suspect inflation will close this year around the 2% target.
The September’s minutes are likely to reveal that the Committee remains in ‘wait-and-see’ mode. The upward revision to Q2 GDP and the pick-up in survey evidence, including Lloyds TSB Business Barometer and the manufacturing and services PMIs, will have been welcomed by the Committee. Although discerning the underlying trend in growth this year has been made difficult by one-off effects such as the additional June bank holiday and the Olympics, the Committee should have a better idea of this by the November meeting, when they will have had sight of Q3 GDP and can judge the initial impact of the FLS. This is also when the current round of asset purchases will be complete. Nevertheless, recent comments from some members suggest that they remain open minded about the need (and efficacy) of further QE, while the scope for further action may be limited by recent upside risks to the inflation outlook.
Retailers reported that there was no discernable evidence of any ‘pre-Olympic impact’ in July and headline retail sales rose by 0.3%. Yet economic data have been volatile over the past few months and subject to substantial revisions. Lloyds TSB suspect July’s rise could be revised, as was the case in June when sales were revised up from 0.1% to 0.8% – closer to Lloyds TSB 0.6% estimate. The bulk of any Olympic effect would have occurred in August. However, anecdotal evidence has been mixed. The BRC suggest a mildly negative impact, while retailer reports, such as John Lewis, have been more upbeat. This adds to the uncertainty over August’s retail sales. Lloyds TSB pencil in a 0.5% contraction in headline sales, and a fall of 0.4% excluding fuel sales.
The public finances continued to worsen in July, with the latest month’s shortfall over £3bn worse than the previous July, in part reflecting weaker corporate tax receipts. So far this year, the finances are £11.5bn worse, after allowing for one-off capital transfers. August looks set to post the first improvement this financial year. Lloyds TSB forecast a PSNBX of £13.5bn (£14.6bn a year ago) reflecting a modest softening in spending growth. Even then 2012-13 would be running some £10bn worse than 2011-12 so far. While there is ample scope for revisions over the coming months – although risks of large revisions associated with new payment software appear to be receding – the likelihood is the Chancellor will have to revise his full year deficit forecast higher in December’s Autumn Statement.
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