The squeeze on real wages doesn't appear to be getting any worse after UK CPI for June came in at 2.6%, 0.3% down from May’s 2.9%.
This could well be the high watermark as far as imported inflation is concerned, given that the exchange rate comparatives are likely to be less severe for the July numbers than they were in June, as the Brexit referendum effect starts to drop out of the calculations in the coming months.
In last week's average earnings data for the three months to May, the gap between wages came back slightly after the surprise rebound from the 1.7% lows seen in April to 2%.
We’ve already seen in recent months that PPI input prices, which have had the biggest jumps in the early parts of this year, starting to increase at a much slower rate, from peaks of around 20% at the beginning of this year to be at 9.9% now, while on a monthly basis prices are now starting to decline. Today’s fall is largely as a result of falling fuel prices, (see falling oil prices are good for something), while other services also contributed to the lower-than-expected number.
What hasn’t helped in terms of the cost of living is large domestic increases in taxation, from insurance premiums as well as transport fares, which has exacerbated the effect of last August’s rather hasty rate cut, which it could be argued has fuelled the very boom in consumer credit that now has the Bank of England rather concerned about an overleveraged consumer.
This was entirely predictable, as has been the rise in inflationary pressures which now appears to be prompting some debate on the Bank of England monetary policy committee, though it is unlikely that we’ll see any move on policy at next month’s August meeting, given today’s softer than expected CPI reading.
It is also important to note that while CPI showed a sharp fall RPI did not, staying stubbornly high at 3.8% excluding mortgage payments, and it is here that UK consumers are likely to feel it the most.
Bank of England Chief economist Andrew Haldane has already adopted a bit of a reverse ferret from a year ago by suggesting that a rebound in wages might prompt him to start to lean in that direction after his call for a sledgehammer rate cut response last July.
Later today we might get the opportunity to hear Bank of England governor Mark Carney’s latest take on the recent divisions on the MPC and in particular on Ian McCafferty’s intervention last week, where he suggested the Bank of England should consider cutting back on stimulus, if a consensus on rates proves too difficult to reach.
The Bank of England governor is due to unveil the new plastic £10 note featuring Jane Austen and traders will be looking to see if he has any comment to make on monetary policy. It has been suggested that he might steer clear of mentioning monetary policy given his silence when he unveiled the new plastic £5 note just over a year ago. It does need to be remembered that occasion was just before the EU referendum when he was on the receiving end of a large amount of opprobrium and he may have felt that discretion was the better part of valour.
He may feel no such obligation today, and the big question will be whether he employs 'sense and sensibility' with respect to any policy pronouncements, or adopts an approach more akin to 'pride and prejudice'. Either way traders may find that whatever Mr Carney says today, his views on interest rate policy seem to change as often as the weather forecast, and tend to be about as reliable, which means we could see sterling hit 1.3300 in the coming weeks, irrespective of what the Bank of England does, or doesn’t do.
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