Archive

HEM: Rolling Precariously

• Data are resilient, but markets doubt the policy effect
• Rising unemployment would signal a need for rate cuts
• UK wage settlements support a high floor in inflation
• Excess demand and inflation delay BoE cuts to Feb-25
• The Fed and ECB may only delay to Sep-24

UK Wage Wealth is an Inflationary Illusion

• Nominal disposable income continues to surge amid widespread enormous pay rises. Unmatched by productivity, the nominal boost is eroded by inflation to real stagnation.
• The regime of high nominal increases nonetheless inflates away the debt stock, helping sustain affordability despite forceful interest rate increases.
• An inflationary reduction in debt burdens is not real wealth. The UK’s net worth is crashing to record negatives as corporates and households suffer post-pandemic.

By Philip Rush

BoE Hawks Read the Writing on the Wall

• The BoE held the Bank rate at 5.25%, with only one dissent for a cut as the two hawks stopped pushing for a hike that was not going to happen, given broad resistance.
• An extended period of restrictive policy is still envisaged, with persistent inflationary pressures rather than the spot CPI rate guiding when rate cuts begin.
• Wage and service inflation is not seen returning to target sufficiently rapidly yet, and we expect that problem to persist, leaving our call for the first cut back in Feb-25.

By Philip Rush

UK: Sticky Services Persist in Feb-24

• UK CPI inflation slowed 0.1pp further than expected to 3.4% in February amid soft goods prices, but services prices were strong again by only easing to 6.1%.
• Underlying inflation pressures remain sticky, with the median inflationary impulse stuck close to 3%. These data remain inconsistent with a sustainable return to the 2% target.
• Proximity to the target relies upon the temporary drag from falling energy prices and is not a reason to cut. Wage growth is too high, fuelling resilience that postpones cuts.

By Philip Rush