Food and flights
It will be a couple of weeks until UK data for September kicks off in earnest. This week will really only see a delayed publication of July’s retail sales data which, although salient, is unlikely to tip the needle on price. The same is true of next week with growth data to be published on Friday 12th. It will be the following week, in the days leading up to the BoE’s September rate decision on 18th September, that the real data begins. Like most central banks, the BoE is in its upmost data-dependent state, caught between stubbornly high inflation and cooling economic activity.
Market pricing shows no cut expected for September and November. However, given the data driven policy we are seeing, some uncertainty remains around the latter decision. The obsession of the BoE at the moment, as well as services inflation, is food inflation. The logic is interesting. One of the greatest drivers of future inflation is current inflation expectations. If you’re a consumer and you think prices will rise, you’ll front load your purchases driving up demand and therefore price. Hey presto, you created your own inflation. Well, food is one of the most visible day-to-day barometers we see. It’s the most common purchase (for most of us!) so we feel price change in real time. Food inflation is running close to 5%, creating concerns that inflation expectations may become decoupled with gross inflation.
Another stunning source of inflation is air fares that especially this time of year can impact inflation expectations. There isn’t a great deal to be done about either in the short run and there isn’t much good news to report that either should fall rapidly. The BoE is therefore reluctant to cut rates given the ongoing risk to inflation expectations. However, opening the prospect for a possible November cut, other key elements of inflation may begin to fall. Notably, rents have been falling as a result of changes in public housing thresholds. Looking forward, the outlook for November may also be markedly different if the government takes aim at taxation in its autumn budget. Currently it is not clear whether that budget will take place before or after the BoE’s November meeting.
Discussion and Analysis by Charles Porter
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