LONDON: A pickup in UK inflation to a nine-month high in data last week is likely to set the stage for key decisions from the upcoming budget to a likely interest-rate increase.
The report last Wednesday is anticipated by economists to show annual price growth in September at 3.4%.
The result will amount to a reality check for British policymakers returning to London after warm words and an upgraded growth forecast from the International Monetary Fund.
The inflation data are likely to help seal the deal on the first rate hike from the Bank of England (BoE) in over three years in November, while also feeding into the thinking of Chancellor of the Exchequer John Healey, who has vowed to give businesses and households some “breathing space” at this week’s budget.
His fiscal plans are being hemmed in by the global bond rout after the resurgence in energy prices prompted traders to bet on a series of BoE rate increases to contain inflationary pressures.
Gilt yields have risen to around their highest levels in decades, eroding Healey’s already-thin fiscal wiggle room. Tax hikes are likely to be needed to fund any cost-of-living measures, with banks set to be targeted.
While the BoE has held off on raising borrowing costs so far, investors are betting on it joining the Federal Reserve and European Central Bank in tightening policy at its upcoming meeting on Nov 5.
“The combination of soaring inflation, resilient demand and a stabilising labour market will make it hard for the BoE to remain on hold.
“We expect a 25-basis-point hike at the central bank’s next meeting in November. We also see another move in February,” said Bloomberg Economics chief UK economist Dan Hanson.
Governor Andrew Bailey said in Bangkok last week that there is little evidence the energy shock is spreading widely across the economy yet, and figures tomorrow will also likely suggest that price pressures from the labour market remain muted.
But the inflation situation is predicted to get worse. Bailey warned that the longer the Middle East conflict drags on, the more difficult it’s becoming to avoid a hike.
The UK central bank is already forecasting that inflation will top 4% in early 2027, double its 2% target.
Elsewhere, Chinese growth data, Japanese inflation, global purchasing manager indexes and a rate decision from the embattled Indonesian central bank may be among the highlights.
In the wake of fresh inflation figures that showed price pressures are accelerating, the United States economic data calendar lightens up.
Tomorrow, separate reports on new residential construction and pending sales of previously owned homes are projected to illustrate the housing market was still struggling for traction in September.
Affordability constraints continue to weigh on demand, with 30-year mortgage rates recently hitting an almost three-year high of 7.5%.
On Friday, S&P Global will release its preliminary October manufacturing and services indexes. Economists see both measures pointing to solid growth, yet at a slightly slower pace. The same day, the University of Michigan releases its final October consumer sentiment reading.
Federal Reserve policymakers are in a media blackout period ahead of the Oct 27 to 28 policy meeting.
In Canada, toda’s inflation update and business outlook will provide the final major clues to how the economy is weathering oil-driven inflation risks and the fallout from escalating trade tensions before policymakers make their next rate decision on Oct. 28.
Headline yearly change in the consumer price index has held near 3% for months, which Bank of Canada governor Tiff Macklem has called “too high”. Economists expect it accelerated in September to 3.2%, though core measures likely held steady.
Meanwhile, retail sales likely rebounded in August after a temporary slump in July, though the resurgence may be short lived.
Albertans will vote today in a referendum that asks whether they’d like to begin a process to separate from Canada. The “remain” side holds a comfortable lead, but federalists fear high turnout for separation will introduce political and economics risks.
Later in the week, Prime Minister Mark Carney will travel to Turkiye to advance talks for a comprehensive trade agreement.
China releasing key economic data and several central banks lining up monetary policy decisions take the spotlight in Asia-Pacific this week.
China releases its third-quarter gross domestic product alongside September retail sales, industrial production, fixed-asset investment and property data today. — Bloomberg
