As if the previous day's UK inflation number was not bad enough, yesterday saw the Bank of England's inflation report providing a gloomy set of forecasts. Reuters reports:
The economy could shrink for a quarter or two and inflation may near 4 percent this year, the Bank of England said on Wednesday in its bleakest forecasts since the Labour government took power in 1997.
Economists said the expected spike in inflation even further above the central bank's 2 percent target meant that interest rates won't come down quickly, even with news on the housing market downturn getting nastier by the day...
The Bank report shows inflation could hit 3.7 percent this year and still be clearly above its 2 percent target if interest rates come down by half a percentage point over the next year, as many analysts had previously expected...
Economic growth was expected to slow to around 1 percent at the end of this year before picking up to around 2.3 percent in two years -- still below the long-term trend rate.
If the forecasts look worrying, Mervyn King made little effort to ameliorate their impact.
"The Monetary Policy Committee is facing its most difficult challenge yet," said Bank Governor Mervyn King. "We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot, and should not try to, prevent that adjustment."
"Inflation will return to the target and growth will eventually recover to a sustainable rate. But we will need to be patient."
The diverging inflation and growth trends appear to be making themselves felt in the labour market simultaneously. From another Reuters report:
The number of Britons claiming jobless benefits rose for the third successive month in April, official data showed on Wednesday, suggesting a slowing economy is starting to hit the job market.
Figures from the Office for National Statistics showed the claimant count rose 7,200 in April to 806,300. That was the biggest increase since April 2006 and the first time it has risen in three consecutive months for almost two years...
Average earnings in the three months to March rose 4.0 percent, above forecasts and the highest since last November. In March alone, wages rose 4.7 percent, the highest single monthly rise since January 2007.
There was some good news, however, on the inflation front in the US. Bloomberg reports:
U.S. consumer prices rose less than forecast in April, reflecting cheaper furniture and lodging costs that offset the biggest jump in food expenses in 18 years.
The consumer price index increased 0.2 percent after a 0.3 percent gain in March, the Labor Department said today in Washington. So-called core prices, which exclude food and energy costs, climbed 0.1 percent, compared with a 0.2 percent advance a month earlier...
Prices rose 3.9 percent in the 12 months ended in April, down from a 4 percent year-over-year gain in March. The core rate increased 2.3 percent from April 2007, after increasing 2.4 percent in the 12 months ended in March.
Even as inflation slowed though, it continues to weigh on real spending. From Asha Bangalore:
... The good news is that the April report showed a moderation in inflation. At the same time, inflation adjusted retail sales fell 0.3% in April, following a string of declines... [I]nflation adjusted retail sales have dropped for four consecutive quarters at mostly an accelerating pace. The weakness seen in April and forecasts of consumer spending should translate into another quarterly decline in inflation adjusted retail sales...
But the deceleration in inflation should take a bit of sting out of Willem Buiter's post yesterday, which criticised the Fed for having "let inflation get away from it even more than the ECB and the Bank of England".
Nevertheless, Buiter's overall point appears valid. He wrote that inflation "is rising just about everywhere", and that ultimately, central banks are responsible. Notwithstanding the deceleration in April, headline inflation in the US is already "way above what should be the Fed’s comfort zone" while core inflation, though lower, has ceased to be a superior predictor of future headline inflation (see also my take on the latter).
Indeed, the global nature of rising inflation has become apparent in recent months. Even Japan could be facing rising inflation as wholesale prices rose in April at close to the fastest pace in almost three decades.
Fund managers also think that global inflation is rising. From MarketWatch:
A rising number of fund managers say inflation is set to accelerate over the next 12 months, according to Merrill Lynch's monthly survey for May.
According to the report, a net 25% of fund managers believe that global core inflation will be higher in a year's time, up from 7% who held this position in April and 17% in March...
The number of asset allocators who believe bond markets are currently overvalued nudged up to 48% in May, up from 47% in April, while the number of managers that think global equity markets are undervalued fell to 15% in May, down from 26% in April.
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