UK shop prices point to inflationary pressures

Chris Scicluna
Emily Nicol

MoF capex survey points to a modest upwards revision to Japanese GDP growth in Q4
Data-wise, the Japanese MoF’s latest capital spending survey published overnight signalled a marked improvement in the financial health of Japan’s corporations in the final quarter of last year ahead of the latest pandemic wave. And it also suggested a stronger private sector capex outturn than initially implied in the first GDP release. In particular, capital spending jumped 2.7%Q/Q in Q4 to a new pandemic high, and some 5½% higher than a year earlier, albeit leaving it still some 5% lower than the pre-Covid level. The rebound was seen across the manufacturing and non-manufacturing sectors alike, with investment rising 3.8%Q/Q and 2.2%Q/Q respectively. The preliminary Q4 national accounts estimated that non-residential investment rose just 0.4%Q/Q in real terms and 1.0%Q/Q in nominal terms. And so, we would expect to see a modest upwards revision to private sector capex growth, when updated Q4 GDP numbers are published a week today. While this might well be offset by a larger decline in public sector investment, our colleagues in Tokyo also expect the drag from inventories (0.1ppt) to be revised away. As such, we expect GDP growth to revised very slightly higher by 0.1ppt to 1.4%Q/Q in Q4.

Among the other survey detail, there was a notable improvement in sales on the back of the temporary loosening of restrictions, which increased by more than 5%Q/Q, the most in five quarters, with non-manufacturing sales growth (5.1%Q/Q) the strongest since Q210. So there was a sizeable increase in profits too, up by more than 17%Q/Q to a near-record high (exceeded only since the series began in 1985), suggesting that, as and when economic uncertainty eases, firms should have plenty of scope to increase their capital spending.

Euro area inflation to rise to a new euro-era high with pressures likely more broad-based;ECB Chief Economist to give clues to what to expect at next week’s policy meeting
Data-wise, the key release from the euro area today will be February’s inflation estimate. With German inflation on the EU-harmonised measure having yesterday risen 0.4ppt to 5.5%Y/Y and following notable upside surprises to the equivalent French, Italian and Spanish numbers, we now expect the euro area headline HICP rate to rise 0.7ppt to a new record high of 5.8%Y/Y. While energy and food inflation are likely to have risen further, the national release also suggest evidence of some broadening of price pressures. So having dipped to 2.3%Y/Y in January thanks principally to the timing of tax changes and New Year discounting, we also expect a rebound in goods and services price inflation to push the core CPI rate at least back up to December’s reading of 2.6%Y/Y. German labour market data for February are also due.

Ahead of the pre-meeting seven-day blackout period, a few more Governing Council members are scheduled to talk publicly, with arguably of most interest in ECB Chief Economist Lane’s speech in the afternoon which would hopefully elaborate on his assessment of the impact of the Ukraine conflict on the euro area economic outlook. We expect him to acknowledge the significant risks to the outlooks for inflation, output and financial stability, which will merit a far more cautious approach to policy from the ECB from now on.

Further BoE policymakers to speak publicly today after yesterday’s hawkish comments from two MPC members; UK shop price inflation up again
Contrasting with the dovish commentary from ECB Governing Council members over the past couple of days, public remarks yesterday from external BoE MPC members Saunders and Mann, both of whom voted for a 50bps rate hike in February, signalled again their intentions to vote for further tightening later this month. Saunders judged that additional tightening now could help to limit the total scale of tightening required to return inflation to target, while Mann repeated that her strategy was very much to front-load rate hikes to counter rising price and wage expectations, with both believing that high inflation is becoming embedded. While recognising that the unfolding events in Ukraine posed upside risks to near-term inflation, Saunders acknowledged that it was not yet clear what these developments would mean for the inflation outlook 2-3 years ahead. And so he would not be drawn into what the conflict would mean precisely for monetary policy. Nevertheless, Saunders also stressed that his preference for a 50bps hike in February does not necessarily imply that he would vote for a 50bps steps in the event that rates have to rise further. And we would expect both him and Mann to vote for a hike of 25bps when the MPC meets to set policy on 17 March.

This evening, however, the two scheduled MPC speakers might be rather warier of the downside risks posed by the Ukraine conflict than were Saunders and Mann. Certainly, BoE Deputy Governor Cunliffe should be mindful of financial stability risks from Russia and the scope for such shocks to have unpredictable and damaging consequences; and external member Tenreyro is typically the most dovish member of the Committee.

Of course, over the near term, UK consumer price inflation is set to rise sharply higher to above 7%Y/Y by April. The latest BRC shop price survey released reported increased price pressures on the UK high street last month, despite the ongoing erosion of household real incomes and intense competition among retailers. The survey’s headline inflation measure – which is inevitably tracking well below CPI inflation, not least due to the exclusion of prices of energy, cars and services – rose 0.3ppt in February to an eleven-year high of 1.8%Y/Y. Pressures came in part from higher prices of fresh food, which accelerated 0.4ppt to 3.3%Y/Y, the most since 2013, on poor domestic harvests and global developments. But non-food inflation was also up 0.4ppt to 1.3%Y/Y, the most since 2011, as supply bottlenecks and rising costs were passed on a little more to consumers.

Consistent with the strong mortgage lending and approvals numbers at start of the year, today’s Nationwide house price index reported a further sizeable increase in February, with prices up for the seventh consecutive month and by a 1.7%M/M (the strongest since 2009 when excluding the spikes relating to the initial pandemic bounce-back and government’s Stamp Duty holiday last year). This saw annual house price growth accelerate 1.4ppts to 12.6%Y/Y, the strongest pace since last June (when growth was flattered by weak base effects and government initiatives) – excluding last June, growth was last stronger in 2004. While the ongoing supply-demand imbalance will continue to exert upwards pressure on house prices, the near-term outlook remains clouded by the increasingly squeezed household budgets, declining consumer confidence, and prospects of further rises in Bank Rate over coming months.

Jay Powell testimony the main focus in the US; ADP report to be watched ahead of Friday’s payrolls number
Most attention in the US will be on Fed Chair Powell’s testimony to Congress. The economic impact of events in Ukraine will be much less forcefully felt in the US than Europe, due to a much lower level of trade and financial integration with Russia and energy self-reliance. And given the strength of the US economic recovery, the Fed will be less concerned about any tightening of financial conditions too. So, Powell will certainly signal ongoing tightening ahead, although he should be mindful of the risks from the conflict via weaker demand from Europe as well as financial channels. Atlanta Fed President Bostic yesterday suggested that, if inflation remains strong, he’d be open to four hikes of 25bps apiece rather than the three he’d pencilled-in in December.

Data-wise, this afternoon will bring the US private-sector ADP employment survey, which is expected to report a monthly increase in payrolls of 375k in February, more than reversing the near-300k drop recorded in January. 

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