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Next week's economics: 15-19 Jan

Next week's figures could show that UK inflation is falling and that the US economy is doing well.
January 11, 2018

UK inflation might finally be falling, next week’s figures could show. Economists expect consumer price inflation to fall from 3.1 per cent last month to 3 per cent. They also expect to see producer output and input price inflation fall.

This would be due not so much to new disinflationary developments as to the disappearance of old inflationary ones; price rises for food and petrol in December 2016 will drop out of the data. Economists expect to see further falls in inflation early this year for similar reasons. The recent pick-up in commodity prices might slow down this process. But, on the other hand, still-low wage inflation, plus tentative signs of rising productivity, suggest that there are no great domestic inflationary pressures.

The drop in inflation isn’t yet boosting consumer spending, however. Friday’s official figures might show that retail sales volumes fell in December, as sales were hit by bad weather and were pulled forward into November by Black Friday. For the fourth quarter as a whole, however, sales should be good – up by over 1 per cent. Insofar as this has been driven by people borrowing more and dipping into their savings, however, such strong growth is not sustainable.

Overseas, the news might be mixed. In Germany the ZEW survey of financial professionals might show that optimism has flatlined for the last four months. This might be a warning that the current very strong growth rates won’t be sustained.

In the US, though, the news should be good. Official figures should show that industrial production rose in December giving quarter-on-quarter growth of a hefty 1.5 per cent – thanks to a bounceback from the effects of hurricanes as well as strong underlying growth. The New York Fed’s survey of manufacturers should also show both strong current trading conditions and optimism for the future. To add to the cheery picture, housing starts should also rise.

The US economy has therefore good momentum going into 2018. Some economists expect GDP growth this year of 3 per cent, the best since 2005.

This doesn’t, however, necessarily augur well for equities, because stock markets might already be pricing it in. In fact, Thursday’s capital flows figures from the US Treasury could show that foreign buying of US equities rose last year. This has in the past been a sign of excessive confidence about stock markets and hence a harbinger of a fall.