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Next week's economics: 29 Nov - 3 Dec

Next week will bring more evidence that mismatches between supply and demand are raising inflation – probably only temporarily
November 25, 2021

The trade-off between inflation and economic activity has worsened around the world, next week’s numbers will show.

In the eurozone, official figures could show that consumer price inflation has risen to 4.2 per cent, its highest level for 30 years. This is not, however, the result of exceptionally strong demand. Other data in the week will show that retail sales volumes rose less than 2 per cent in the last 12 months and that the unemployment rate, at over 7 per cent, is still above pre-pandemic levels.

US numbers will show a similar thing. Wednesday’s ISM survey will report rising prices and shortages of materials and Friday’s labour market numbers will show annual wage inflation of over 5 per cent, well above pre-pandemic levels. Those same numbers, however, will also show that the unemployment rate, at around 4.5 per cent, is still a full percentage point higher than it was in 2019.

In both cases, we have the same problem. Post-lockdown recoveries have caused mismatches between the patterns of supply and demand, so that unemployment co-exists with shortages and rising prices. Such mismatches are common in the early phases of economic upturns – we saw a similar thing on a smaller scale in 2010-11 – but they should fade over time. And the ECB will predict just this. At Thursday’s press conference ECB president Christine Lagarde will repeat the bank’s view that inflation will fall next year.

Elsewhere, we could see that output is being held back by shortages of key parts, not least of which are of computer chips for cars. Purchasing managers in China, the eurozone and UK are all likely to report this problem. And in Japan, official figures will show that output has been weak in recent months for a similar reason.

In the UK, Bank of England data could show that the post-lockdown recovery is weaker than some expected. They’ll show that households are still adding to their bank deposits, contrary to expectations that they would run down the cash they had accumulated during the lockdowns, and consumer borrowing is recovering only slowly after the lockdowns had forced us to cut our spending. What’s more, the numbers could show that companies are repaying debt. That’s partly good news – it means they have the revenue to do so – but partly bad as it suggests we are not seeing a big upturn in capital spending.