Much of the world economy is growing well, accompanied by inflation pressures, next week’s numbers could show.
In both the UK and eurozone, final purchasing managers’ surveys should confirm the flash readings which showed output and orders increasing in both manufacturing and services, thanks in part to declining staff absences caused by Covid. Meanwhile the ISM survey in the US should also show increases in output and new orders in manufacturing.
All of these surveys, however, will also show strong rises in both input and output price inflation, with supply constraints restricting output growth.
US employment data will confirm this pattern. They are likely to show another big net increase in non-farm payrolls in February. They will also show rising wage growth, with average hourly earnings in the private sector up by almost 6 per cent from a year ago. Other measures, though, will show that the labour market is not very tight. The unemployment rate, at around 3.9 per cent, will still be above its pre-pandemic low and the ratio of employment to population well below pre-pandemic levels. This suggests that part of the wage inflation is due not to generalized excess demand but to mismatches between labour demand and supply. These should fade over time.
We’ll also get troubling inflation news from the eurozone, with the flash CPI reading showing that inflation has risen again, to around 5.2 per cent. There might also be some comfort here, though. Core inflation (which excludes food and energy) might be flatlining at around 2.6 per cent.
Not all of the world economy is doing so well, however. Purchasing managers could also report that manufacturing in China is stagnating. This could be good news for inflation, as it points to weak demand for many raw materials which should cap their prices.
It’s not just goods and services that are seeing inflation, though. So too is the housing market. The Nationwide is likely to say next week that house prices are 11 per cent up on a year ago. Most economists, though, think this is unsustainable. With prices rising faster than wages, housing is becoming even more unaffordable, and this will limit demand – as, eventually, will rising mortgage rates. Bank of England data might show that this process is starting: mortgage approvals are likely to have flatlined in recent months.
Bank data might also pressures on household finances, with consumer debt now rising, having been repaid during the pandemic, and bank deposits growing more slowly. These are effects of the squeeze on real wages.
