UK Retail Sales, And The Slowing UK Recovery

UK retail sales

The BOE has had a pretty good week in terms of macroeconomic releases, with most data coming in within their outlook.

Presumably, this means that their monetary policy is on track. But that might change with the release of retail sales data tomorrow, with expectations that the delta variant might have dented appetite from buyers.

The pound has been slipping through most of the month as the market adjusts to the idea that the BOE won’t be changing policy as soon as economists anticipated. That is because inflation came in as expected, and remained at the BOE’s target level.

Moreover, Bailey came out after the last meeting to say that they will be looking at “medium-term” inflation trends. This is like the Fed’s view of allowing “transitory” higher inflation, without explicitly saying it.

Will the dissent go away?

At the last BOE meeting, only Saunders said that it was time to end the QE program, arguing inflationary pressures. But with the latest CPI data, he might have changed his mind.

The underlying issue, however, is a warning that a lot of UK businesses have been mentioning in their reports: they are not passing on as much of their operating costs to their customers as they would like. In fact, the producer price index has risen at more than double the rate of the consumer price index.

The pressure has to go somewhere

This idea of increasing costs for raw materials but not raising prices compresses corporate margins. This means they will have less capital for future investment and less potential for growth.

Businesses will have to manage that margin problem somehow, either by raising prices or cutting employees. The BOE doesn’t favor either option.

So far, the unemployment figures have come in line with the central bank’s expectations. They are still expecting a 4.0% increase in inflation, suggesting that they are hoping higher prices will resolve the margin compression problem.

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