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UK economic data next week is expected to show a mix of mounting inflationary pressures and ebbing confidence that could make uncomfortable reading for the Bank of England.
Wednesday’s inflation data is expected to show a 2.8 per cent annual rise in consumer prices in January, up from 2.5 per cent the previous month, reflecting the introduction of value added tax on private school fees and a rebound in airfares.
While the rise in inflation would be in line with the BoE’s own forecasts — which see annual price rises accelerating to 3.7 per cent by mid-2025 — it could nevertheless be awkward for a central bank that cut interest rates this month, with two members of its monetary policy committee voting for an extra-large half percentage point cut.
Higher inflation “would at the margin complicate [the BoE’s] message, which is to look through this current inflation ‘hump’ as . . . temporary”, said Sandra Horsfield, an economist at Investec.
Separate data on Tuesday is expected to show that the annual growth rate in wages climbed to 5.9 per cent in the three months to December. That would be above the 5.6 per cent in the three months to November and would continue the upward trend from the 4.9 per cent rate in the three months to September.
Horsfield also forecasts a deterioration in business and consumer confidence when February data is published on Friday, in part reflecting uncertainty over US President Donald Trump’s trade policies.
However, she expects a rebound in retail sales in January after a disappointing end to last year. Valentina Romei
Is the run of strong US economic data set to continue?
A survey of business activity in the US services sector is expected to show accelerating growth, extending a streak of strong economic data that has led investors to scale back their bets on interest rate cuts.
The February reading for S&P’s services purchasing managers’ index, due on Friday, is forecast to come in at 53.5, according to FactSet estimates, up from 52.9 a month earlier. Any reading above 50 signals expansion, while a figure below that threshold indicates contraction.
Evidence of stronger activity in the services industry would continue a run of buoyant economic data, including a resilient January payrolls report and a stronger-than-expected inflation reading. Those recent updates sparked a sell-off in US government bonds and stocks, as traders pushed back their predictions for the Federal Reserve’s first rate cut this year.
However, next week’s US manufacturing PMI is forecast to come in at 50.7 — still in expansion territory, but down slightly from a previous reading of 51.2.
“The bottom line is clear: the Fed should not be cutting. No matter which way the Fed chooses to slice and dice the data — headline, core and supercore — they all came in higher than expectations,” said Daniel Siluk, a portfolio manager at Janus Henderson, following Wednesday’s consumer price index reading.
“While early year CPI reads are notorious for seasonality and distortions, the labour market is clearly stable and economic conditions don’t warrant easier conditions. All signs suggest that the neutral interest rate should be higher.” Harriet Clarfelt
How strong is Eurozone business activity?
Eurozone business activity data due on Friday could offer investors further clues about the pace of interest rate cuts ahead of next month’s European Central Bank meeting.
The February reading of the IHS Markit composite purchasing managers’ index — which combines manufacturing and services activity — will give an early insight into how European economies have been reacting to Trump’s plans to impose sweeping tariffs on the bloc.
The US president has said he would put “reciprocal” tariffs on the country’s trading partners, both allies and adversaries on a “country-by-country” basis.
Many of the bloc’s largest economies, including Germany and France, are already battling an economic slowdown. A consensus of analysts expects a PMI reading of 50.5, just above the 50 mark that separates growth from contraction. That would mark a slight improvement on January’s reading of 50.2, which surprised on the upside.
The figure could be an important input for ECB policymakers. This month it cut rates by an expected 0.25 percentage points, as it tread a fine line between inflation — which in January came in above expectations — and weak growth.
With recent data showing a weakening labour market and with disinflation “on track”, according to ECB president Christine Lagarde, the central bank is widely expected to cut rates by 0.25 percentage points from the current 2.75 per cent.
The PMI report also provides a snapshot of companies’ hiring expectations, which would give further hints for the ECB about the state of the labour market, according to Tomas Dvorak, an economist at Oxford Economics.
“If firms do start larger-scale lay-offs, this could force the ECB into faster rate cuts . . . it already seems behind the curve,” he said. Mari Novik
