Inflation at 2.9%, pay gap to widen

There is an expression that it is an ill wind that blows nobody any good! So it is with the U.K. economy where a headline year on year inflation figure of 2.9% brought a rise for the pound that has reached over 4% in just three weeks.

The “relief rally” that followed the passing of the first reading of the so-called Repeal Bill in Parliament could be short-lived although for now the pound has risen above 1.3300 and 0.9000 although the latter move has since been reversed a little.

Fuld and clothing prices were the main contributors to price rises which saw inflation rise from 2.6% in July exceeding analysts’ expectations for a 2.8% rise. It seems certain that the 3% level will be reached this month as there is little likelihood of fuel prices, in particular, falling as supply issues will remain following Hurricane Harvey and demand increases with the onset of the northern hemisphere winter.

The outlook for the pound is further clouded by the performance of other G7 currencies who face their own headwinds as monetary policy decisions are driven by improving economies and a concern that there is sufficient self-sustaining growth to warrant higher rates.

Bank of England Facing difficult decision

Tomorrow’s meeting of the Monetary Policy Committee of the bank of England will be faced with the difficult decision of leaving rates unchanged as the economy suffers from Brexit uncertainty as inflation continues to rise almost out of control.

Governor Mark Carney will face tough questions from the press as he is likely to continue his mantra that inflation is a product of the fall in the pound and he is concerned over the headwinds facing the economy going forward which precludes any change to monetary policy.

Carney is at pains to say that he looks at data as a series of events and won’t react to single releases. This could come back to bite him as the trend for inflation is undoubtedly higher despite the odd outlier seen in the summer.

Today’s release of employment data, the most visible number other than inflation, will show that the gap between prices and wages is continuing to rise. There is a possibility that the gap could remain unchanged as the rate of hourly earnings increases could rise to 2.3% from 2.1%. Yesterday the Government announced the removal of the pay cap for police and prison staff and this should have a positive albeit brief effect on the data going forward.

Brexit; the shadow over everything

Analysts talk about the “perfect storm” of politics, monetary policy and macroeconomic data as being the Holy Trinity which drives currency values. Now and for a long time to come those factors will overshadowed, as far as Sterling is concerned, by the all-encompassing influence of Brexit.

Monday’s passing of the first stage of the Repeal Bill has brought a little relief but no one should doubt the battles that are still to come. The opposition is determined to make as much difficulty for the Government as possible, opportunistically opposing every step without having the burden of offering any alternative.

The economy is almost solely influenced by Brexit. Small and Medium Enterprises have found it increasingly difficult to plan as they have no idea how their market will be affected even if they don’t export. The ability of businesses to find a stable workforce is being affected by EU migrants leaving due to the uncertainty of their position.

The recent rally for the pound may be short-lived and the march lower is likely to recommence but at least, particularly against the dollar it will be falling from better level.

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