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Next week's economics: 16-20 April 2018

Next week's numbers could show that inflation is falling – but so too are retail sales
April 12, 2018

Real wages are rising at last. On Tuesday, the Office for National Statistics (ONS) is likely to say that average earnings rose by around 3 per cent in the year to February. With consumer prices index (CPI) inflation then at 2.7 per cent, this means wages rose slightly in real terms. This is unlikely, however, to be the start of a boom.

The best reason to expect real wages to rise is simply that price inflation should fall as last year's rises in import prices drop out of the data. We should see this on Wednesday, when CPI inflation might fall again – to around 2.6 per cent – as a rise in food prices last March drops out. This would be the lowest inflation rate for 12 months. Manufacturers’ output price inflation should also fall to around 2.4 per cent, its lowest rate since November 2016.

One thing, however, will hold wages down; productivity. Tuesday’s figures are likely to show a rise in hours worked in the three months to February which would imply that GDP per hour was flat then. It looks as if the rise in productivity in the second half of last year was just a blip. This matters simply because if we’re not producing more we cannot earn more.

Increases in hours worked do not, however, necessarily mean a fall in unemployment. In fact, Tuesday’s figures might show this to be rising. This is because the labourforce is expanding, in part because the number of economically inactive people is falling.

The rise in real wages does not automatically mean good news for retailers. Official figures on Thursday might show that retail sales volumes fell in March, leaving them down in the first quarter as a whole compared with the fourth. It’s likely that snow early in the month depressed spending. But there’s also a more fundamental force likely to do so this year: households’ desire to restore their savings, having reduced them last year.

Meanwhile, official US figures should show that industrial production rose in March, leaving it almost 1 per cent up quarter on quarter. Surveys by the New York and Philadelphia Feds might be more interesting, though, as they’ll give us clues as to whether the threat of a trade war is dampening manufacturers’ expectations.

Investors should also watch out for Monday’s US capital flows data. These have recently shown big foreign buying of US equities. In the past, this has been a strong leading indicator of falls in share prices globally.