Bank of England Quarterly Inflation Report to Be Focus of Attention in Heavy Week for U.K. Economic Indicators

The Bank of England was obviously reluctant to cut interest rates at the November meeting of its Monetary Policy Committee (MPC) due to ongoing inflationary risks stemming from record high oil prices, elevated commodity and food prices, companies' pricing power, and possible capacity constraints. Furthermore, the Bank of England has long believed that some slowdown in growth is necessary to dilute inflationary pressures. Significantly, the MPC have frequently indicated that they will not be unduly influenced by one month's data, so they probably want to see further evidence of slowing growth before cutting interest rates, given still significant inflationary pressures.

The main focus of attention next week will be Wednesday's release of the Bank of England's Quarterly Inflation Report for November, while the comments of Bank Governor Mervyn King will also be scrutinized at the accompanying press conference. We expect the Bank of England to lower its GDP growth forecasts for next year, and to indicate that modestly lower interest rates will probably be needed if consumer price inflation is not to be below the 2.0% target level on a two-year horizon.

Nevertheless, data out next week is expected to show that annual producer input, producer output, consumer price, and retail price inflation all rose in October, as they were pushed up by high oil and food prices, as well as unfavorable base effects. We expect producer price output inflation (out Monday) to have risen 0.2% month-on-month (m/m) in October. While not a particularly sharp increase, unfavorable base effects mean that the annual rate of increase is set to rise to a 17-month high of 3.3% in October from 2.7% in September. Meanwhile, core producer output prices are also seen rising 0.2% m/m in October, with the annual rate of increase staying at 2.2%. Producer input prices are likely to post a significant increase in October, largely due to markedly higher oil prices.

Consumer price inflation (out Wednesday) retreated from a peak of 3.1% in March to 1.8% in both August and September. Higher oil and food prices, as well as unfavourable base effects, are seen pushing up consumer price inflation to 1.9% in October, with the upside limited by significant discounting by a number of retailers. Underlying retail price inflation is seen similarly climbing from 2.8% in September to 2.9% in October. All-items retail price inflation is seen rising more markedly from 3.9% in September to 4.1% in October, lifted by higher mortgage interest rates resulting from the credit crunch.

Reflecting still relatively healthy growth through the third quarter, we expect claimant count unemployment (out Thursday) to have fallen by a further 5,000, with the unemployment rate remaining at 2.6%, which is the lowest level since April 2005. Meanwhile, pay is expected to have edged up, but to nevertheless have remained relatively muted, with annual average earnings rising 3.9% in the three-months to September including bonuses, and by 3.8% excluding bonuses. While up from lows of 3.4-3.5% in the three months to June, this is still substantially below the 4.5% level that the Bank of England regards as consistent with its 2.0% target for consumer price inflation. Despite retail price inflation being above 4.0% for much of this year and unemployment falling, there still appears to be sufficient slack in the labour market to limit workers' bargaining power. Pay is also being kept down by the government's determination to limit public sector awards.

Meanwhile, survey evidence from the British Retail Consortium (BRC) and the Confederation of British Industry (CBI) has indicated that retail sales lost momentum in October. Consequently, retail sales (out Thursday) are forecast to have been only flat month-on-month in October, causing the year-on-year increase to moderate to 4.7% from 6.3% in September. The Bank of England will be looking closely at the retail sales deflator to see if retailers are now repeatedly engaging in substantial discounting to get consumers to spend. If this is the case, it will ease the bank's concern over their pricing power. The deflator declined 1.5% year-on-year, which was the largest fall since January 2005 and followed drops of 1.0% y/y in both August and July.

We expect consumer spending to soften notably over the coming months, as higher interest rates increasingly feed through to weigh down on consumers in tandem with muted real disposable income growth, increased debt levels, and a slowing housing market. On top of this, there remains the risk that consumer confidence could be hit markedly by increased worries about the general economic outlook, leading consumers to further tighten their belts.

Finally, we expect house price data and survey evidence from the Department for Communities and Local Government (for September)and from the Royal Institute of Chartered Surveyors (for October)to add to the overall evidence that housing market activity and prices are cooling as the sector is increasingly squeezed by the credit crunch and the rising affordability pressure on house buyers coming from higher interest rates, elevated house prices, and modest real disposable income growth.

In particular, we expect the Royal Institute of Chartered Surveyors (RICS) survey to indicate that the balance of surveyors reporting that house prices rose over the previous three months, retreated further to -17% in October, after plunging to -14.6% in September from +10.8% in July and a peak of +47.7% in October 2006. August and September marked the first negative readings since October 2005. We also expect the forward-looking elements of the RICS survey to point to a further slowdown in housing market activity over the coming months. The September survey showed that new buyer enquiries fell at the fastest rate since March 2003 and for the tenth month in a row, with the decline widespread across all regions. Meanwhile, surveyors' confidence on the prices and sales outlook deteriorated to respective 28-month and 54-month lows in September.

By Howard Archer

11 Nov - Producer Price Output Inflation October NSA (Month-on-Month): +0.2%

11 Nov - Producer Price Output Inflation October NSA (Year-on-Year): +3.3%

11 Nov - Producer Price Output Inflation ex Food, Tobacco etc. October SA (Month-on-Month): +0.2%

11 Nov - Producer Price Output Inflation ex Food, Tobacco etc. October NSA (Year-on-Year): +2.2%

11 Nov - Department for Communities and Local Government House Prices September (Year-on-Year): n.a.

13 Nov - Royal Institute of Chartered Surveyors House Price Balance October: -17%

13 Nov - Consumer Price Inflation October (Month-on-Month): +0.3%

13 Nov - Consumer Price Inflation October (Year-on-Year): +1.9%

13 Nov - CoreConsumer Price Inflation (ex Food, Drink, Tobacco) October (Year-on-Year): +1.7%

13 Nov - Retail Price Inflation October (Month-on-Month): +0.3%

13 Nov - Retail Price Inflation October (Year-on-Year): +4.1%

13 Nov - Underlying Retail Price Inflation October (Month-on-Month): +0.3%

13 Nov - Underlying Retail Price Inflation October (Year-on-Year): +2.9%

14 Nov - Claimant Count Unemployment Rate October (%): 2.6%

14 Nov - Claimant Count Unemployment Change October ('000s): -5k

14 Nov - Average Earnings including bonus September (3-Month/Year): +3.9%

14 Nov - Average Earnings excluding bonus September (3-Month/Year): +3.8%

14 Nov - International Labour Organization Unemployment RateSeptember (%): 5.4%

15 Nov - Retail Sales October (Month-on-Month): +0.0%