Good morning,

GBP: Further inflation gains down to wages, fuel or sterling

Sterling rattled lower yesterday with GBPEUR slipping to a 3 week low following the latest run of inflation numbers. A CPI number of 3% is at the top end of the target range but is lower than both the market’s (3.1%) and the Bank of England’s internal estimates (3.2%) of how quickly prices would be rising here in the UK.

To us therefore it looks like we are coming to an inflection point in inflation in the UK, input prices are now only 4.6% higher on the year compared to figures of more than 4x that earlier in the year as the devaluation of the pound following the Brexit referendum falls out of the inflation calculations. If inflation is going to head higher from here it will be predicated on either higher oil and energy costs, additional falls in the pound or, as the Bank of England has been emphasising of late, from wages. We however remain unconvinced of the ability of the real wage picture in the UK to turn reliably positive in the coming quarters.
UK businesses that trade internationally will be glad for the fall in input prices (4.6% is the lowest level since July 2017) but margin pressures will remain into 2018. Those of us who were foolhardy enough to brave the High St this weekend will know that pre-Xmas sales have already begun, we expect further discounting to drag the CPI picture lower into the New Year.
Today’s employment numbers are more important than the inflation numbers however given the focus of policymakers on how pay growth will progress and drive inflation onward.

Brexit: Just in time or just a mess

Debates on the European Union withdrawal bill began yesterday and while some front pages have led with the news that some Tory MPs will vote antagonistically to Brexit, the most important intervention came outside the Chamber, in a committee room. Honda UK said it and its Swindon factory relied on 350 trucks a day arriving from Europe to maintain operations with just an hour’s worth of parts being held in reserve. A 15min delay costs the business £850,000.

Similar fears were echoed by Aston Martin and other members of the Society of Motor Manufacturers and Traders present with concerns varying from import and export tariffs on goods and finished vehicles as well as threats that the EU will no longer recognise UK regulations.
This is what trade looks like outside the European Union and particularly the Customs Union and while some industries will have better margins than the 2-4% that is typical in the car industry, the costs can quickly overawe profits.

EUR: GDP figures give single currency a lift

The single currency really enjoyed a day in the sun yesterday, driving higher across the board as traders celebrated strong GDP readings from both Germany and Italy. The world is truly tipped on its head when Italy is growing faster than the UK, their politics are calmer but it’s England who is off to the World Cup.

Have a great day.
Jeremy Cook, Chief Economist