Overview of the week commencing 22 May

Blog  |     |   by Graham Cross

Graham Cross, CEO

Graham Cross, CEO

UK – inflation and retail sales

The popular measure of inflation – the consumer price index – rose 2.7 percent year on year in April, up from 2.3 percent in March. The CPIH measure is a variant of CPI which additionally accounts for ‘owner occupier housing’ costs. CPIH is, in our view, a more comprehensive assessment of the general rise in prices in the UK. In time, it will replace CPI as the dominant measure. And with that in mind, CPIH jumped to 2.6 percent in April, up from 2.3 percent in March.

Last month’s inflation reading was suppressed by the timing of the Easter weekend (Easter fell in March last year and April this year). Accordingly, this month’s reading is boosted. The Office for National Statistics (ONS) reports a rise of 18.6 percent on last year’s airfares ‘reflecting the usual pattern of increasing prices around Easter’. Of course, prices are rising at an above target rate with or without the Easter anomaly. Nevertheless, the Bank of England will not meet rising inflation with rising rates. And, in our view, there is little reason for it to do so.

On retail sales, the consensus was for a rebound in April following the 1.4 percent decline in March. 2.3 percent exceeds those expectations by some distance. A number of factors might have temporarily boosted sales volumes. Much of that increase comes from boosted petrol/diesel sales encouraged by a fall in prices at the pump. Oil prices have since stabilised. The warmer weather too might have added some impetus.

The wider context provides additional perspective. The first quarter of the year saw retail sales fall 1.4 percent and even the high current headline year-on-year growth rate of 4.0 percent lags the longer term average.

It wasn’t just UK retail sales that surprised on the upside. Sales in New Zealand did too. The New Zealand economy is growing at a decent pace and that, it seems, is encouraging ‘Kiwis to return home and non-New Zealand citizens to settle’.

Meanwhile, Chinese retail sales surprised on the downside. Industrial production slowed too, adding further reason to suspect that China’s recent upswing may have peaked. We are still reasonably comfortable with the pace of output growth in China, but we’ll be more comfortable if, in the next few months, we see some easing in the downward trends in manufacturing and services surveys.

Closer to home, Eurozone inflation climbed from 1.5 percent year-on-year in March to 1.9 percent in April. More importantly, core inflation measures gained in momentum from 0.7 percent to 1.2 percent. That suggests that demand-led inflation is broadening. The European Central Bank’s vicious fight with deflation might be nearing a victorious end.


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