Outlook: rate clues in inflation data

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Inflation remains the dominant theme of the week’s economic data releases, with China and the UK set to offer insights into the outlook for monetary policy and potential rate rises.

Among data due on Wednesday in Beijing, producer price inflation for April is expected to moderate to a year-on-year rise of 6.9 per cent, down from 7.3 per cent in March.

But headline consumer price inflation data look set to remain around a 32-month high of 5.4 per cent, softening to a 5.1 per cent year-on-year increase. China’s retail sales growth is expected to rise to 17.8 per cent, up from 17.4 per cent in the previous month.

“The strength of retail sales is underpinned by robust income growth and an improving consumer sentiment in response to China’s determined efforts to cool inflation,” said Madhur Jha, economist at HSBC. “Looking forward, consumer spending will be supported by rapid wage growth amid labour market improvements and rising consumer sentiment, on the back of efforts to cool inflation in the second half of the year without choking off growth.”

The Bank of England’s quarterly inflation report on Wednesday could offer insights on when the monetary policy committee will raise the cost of borrowing from historic lows of 0.5 per cent.

Analysts expect the report to complicate the bank’s dilemma – raising forecasts for inflation while lowering growth estimates – after the disappointing 0.5 per cent gross domestic product expansion in the first quarter.

One of the main contributors to inflation will be high oil prices, which have risen by about 20 per cent since the last inflation report in February.

“BoE governor Mervyn King is likely to reiterate the monetary policy committee’s long-held view that the recovery path will be jagged,” said Amit Kara, economist at UBS.

“The MPC is almost certain to expect stronger economic growth in the second quarter, and if that is the case, and if inflation remains in the 4.5-5 per cent range, the MPC will probably come under pressure to embark on a gentle rate-hiking cycle from August.”

April’s British Retail Consortium retail sales monitor for the UK, due on Tuesday, looks unlikely to upset the doves on the MPC after its last reading showed a decline in like-for-like sales of 3.5 per cent across the high street.

The US trade deficit for March, published on Wednesday, is forecast to grow from $45.8bn in February to $48bn in March, but with both imports and exports rebounding after the last set of data revealed a surprise slowdown.

In the eurozone, Friday’s first-quarter German GDP growth is expected to double to 0.8 per cent from the previous three months, helped by continued industrial sector strength.

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