Inflation will jump next week. On Wednesday the ONS is likely to say that consumer price inflation in October rose to around 4.5 per cent, its highest rate for almost 10 years. This is due to higher energy prices, a rise in VAT on the hospitality trade, and to higher petrol prices. Further rises are likely in the next few months.
Price increases, however, are not being matched by wage increases. Tuesday’s data could show that annual growth in average weekly earnings fell in September to just over 4 per cent, an 11-month low. This will confirm that the high annual wage inflation seen in recent months was one-off – the result of weekly hours returning towards normal after last year’s lockdown was eased. In fact, the ONS is likely to say that, adjusted for inflation, wages have not increased at all since December. This would tell us that labour shortages are only localised and are not causing generalised wage inflation.
Unemployment data should corroborate this. Although these could show a drop in the official measure to below 1.5 million, this would still leave the rate above its pre-pandemic level. If we add in those outside the labour force who want a job (as we should) the jobless rate is around its pre-pandemic level. These numbers, however, refer to the period just before the ending of the furlough scheme; figures over the winter might therefore show rising unemployment.
The impact of higher prices might show up in Friday’s GfK report on consumer confidence. It could show that consumer sentiment has dropped to its lowest level since February thanks to the higher cost of living. Such lower confidence could lead to lower spending – in which case we’ll have another reason to suspect that the inflation we are now seeing is only a temporary thing caused by rising prices of a few items.
In the US, we could see mixed signs. Surveys by the New York and Philadelphia Feds could paint an upbeat picture, showing that activity is growing, with companies reasonably optimistic for the future – although this growth is accompanied by rising prices.
Official data, however, might be more downbeat. Although retail sales should have risen in October, they will be lower in real terms than in April. And while industrial production should recover a little after September’s drop, output is still being held back by shortages, such as of chips for cars.
Such ambiguous signs explain why the Fed is reluctant to raise rates.
