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Next week's economics: Dec 13 - 17

Next week will show that inflation is rising, but probably only temporarily.
Next week's economics: Dec 13 - 17

UK inflation could post another rise next week, with consumer price inflation (CPI) possibly reaching 4.5 per cent in November. That won’t be the only evidence of rising inflation: producer price data could show another rise in both input and output price inflation.

Despite this, the Bank of England’s interest rate decision will be finely balanced. Last month, it voted 7-2 against a rise and the news since then hasn’t greatly bolstered the case for a move. In fact, insofar as the discovery of the Omicron variant of the coronavirus could dampen activity, there is a reason for the Bank to err on the side of caution.

Next week’s other news might give the Bank other reasons not to move. Labour market data should show a slowdown in annual wage growth, and that wages have risen less than consumer prices so far this year. This means we are not seeing the sort of wage-price spiral that generates serious inflation. One reason for this is that demand for labour, in total, is still weak: the ONS is likely to say that total hours worked are still 2.5 per cent below 2019’s peak.

And Friday’s retail sales numbers should show that sales volumes are lower than they were in April and May – although month-to-month moves at this time are hard to predict or interpret because of changing times of Christmas shopping and difficulties in seasonal adjustment. Demand, then, isn’t so strong as to cause inflation to surge.

In the US, by contrast, the Fed might actually do something. It won’t raise rates but it could announce a faster pace of reduction in quantitative easing. One reason for it to do so is that the economic recovery seems better established. Official figures should show that both retail sales and industrial production rose in November after a strong October, and surveys by the New York and Philadelphia Feds will show that firms are enjoying decent growth. This will corroborate economists’ expectations that real GDP could grow at an annualised rate of over 6 per cent in the fourth quarter.

By contrast, the eurozone is not doing so well. Official figures could show that while industrial production rose in October, it is still lower than it was in the summer, thanks in part to shortages of parts such as computer chips for cars. Germany’s Ifo survey might confirm this, showing that companies’ assessment of current activity and expectations for coming months have both sagged in recent months.