Here’s the most important point: UK inflation expectations rose significantly last week. I don’t have high frequency data – which would show how much of this move was a direct response to the MPC statement last Thursday – but the Bank’s daily data for gilt-market implied inflation are as follows:
|Wed 3rd Jul||3.1215|
|Thu 4th Jul||3.1925|
|Fri 5th Jul||3.3057|
|Mon 8th Jul||3.2971|
The 5 year implied RPI inflation measure has now regained the March high. Back in March this prompted the Governor to produce relatively hawkish comments on Sterling in an ITV interview. Sterling and expected inflation continue to move in tandem; I’ve inverted the Sterling Exchange Rate Index here to show the correlation; a rising green line meaning a devaluation:
The non-reform of the RPI series (causing that sharp spike right at the start of 2013) continues to impair this analysis, but it seems reasonable to say that inflation expectations are consistent with the Bank continuing to hit at least 2% on the CPI, presuming a circa 1% difference between the CPI and RPI rates. This is good news for the UK economy. And despite the gnashing of teeth about Carney talking down the pound, the Broad Sterling index used here is still stronger than the March low.
(It is frustrating that we have to resort to divining rods to determine market CPI expectations, and that the government apparently rejected the option of introducing CPI linked gilts.)
Other interesting data:
1) The CPI rate rose back up to 2.7% in May which was celebrated by almost nobody. (Liquidity trap? With these CPI figures? et cetera)
2) The ECFIN Business Sentiment Indicator (hat tip to Danny Blanchflower for this one, it seems to be good leading indicator) remains higher than the level we saw for much of 2012, but is still dialled to “slow growth”.
3) Government tax receipts are soaring. This is usually a good indicator, but the receipts data is so completely distorted by “special factors” (“reverse forestalling” from the 45% top rate cut; remissions from the Swiss tax agreement, dividends from the BoE), it is hard to identify any underlying trend. I do not envy the OBR who have exactly that task, read their commentary for more.