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Signs that infla­tion is begin­ning to slow.

 Bri­tain’s robust labour mar­ket, a rise in retail sales and signs that infla­tion is begin­ning to slow have fanned hopes that the Bank of Eng­land’s cycle of interest rate rises may be near­ing its peak. However,

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a flow of critical data over the past ten days sug­gests that the UK eco­nomy is show­ing a level of resi­li­ence that was not in evid­ence just a few months ago. Infla­tion has fallen more than expec­ted, and the labour mar­ket remained robust, accord­ing to the latest data, which has left many eco­nom­ists expect­ing the end to fur­ther interest rate rises by the Bank of Eng­land and a milder reces­sion than pre­vi­ously pre­dicted. With most meas­ures of under­ly­ing infla­tion eas­ing in Janu­ary, the head­line fig­ure fell to 10.1 per cent last month.

Ser­vices infla­tion, a bet­ter meas­ure of domest­ic­ally gen­er­ated price pres­sures, fell more than expec­ted, includ­ing a slow­down in price growth in labour-intens­ive indus­tries, such as hotels and res­taur­ants. There are tent­at­ive signs that infla­tion «may not be as per­sist­ent and stub­born as some feared», said James Smith, eco­nom­ist at the Res­ol­u­tion Found­a­tion, a think-tank. Those fig­ures released last week «increase the like­li­hood of a milder reces­sion» said George Moran, eco­nom­ist at the bank Nomura. Other offi­cial data pub­lished last week showed that the labour mar­ket remained resi­li­ent at the end of last year, adding more jobs than expec­ted and the fall in real wages eas­ing.

Ana­lysts were sur­prised by data released on Fri­day show­ing a rebound in retail sales in Janu­ary, up 0.5 per cent com­pared with a month earlier. In addition, GDP data pub­lished earlier this month showed the eco­nomy man­aged to dodge a reces­sion in the last quarter of 2022, with real house­hold spend­ing mar­gin­ally expand­ing des­pite high infla­tion and rising bor­row­ing costs. «The eco­nomy is prov­ing to be remark­ably resi­li­ent to the dual drags of higher infla­tion and higher interest rates, and it cer­tainly feels as though it isn’t as weak as most had feared,» said Ruth Gregory, deputy chief UK eco­nom­ist at Cap­ital Eco­nom­ics. «Put­ting in place that sort of meas­ure would be an effect­ive way to bring down infla­tion help boost house­holds and, in that way, min­im­ise your chances of a reces­sion,» Smith said.

He added that the fall in whole­sale gas prices from their peak, although «not yet in the actual eco­nomic data», was «incred­ibly good news» for the eco­nomic out­look. However, des­pite the encour­aging data; the UK eco­nomy remains the only one in the G7 not to have recovered to pre-pan­demic levels, while UK infla­tion remains higher than in the US or the euro­zone. «The pic­ture we are get­ting from UK data was bet­ter than eco­nom­ists expec­ted a couple of months ago but far from pos­it­ive,» said Moran. «We are expect­ing a rel­at­ively mild reces­sion while infla­tion wor­ries should be largely behind us later this year, but some of the under­lin­ing weak­nesses are still there,» said Yael Selfin, chief eco­nom­ist at the con­sultancy KPMG.

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  1. Martin20 February 2023 at 10:29

    It's still very early to call it. The UK is not doing very well for some time and it may take months or even years for them to get back to where they were before the pandemic.

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    Replies
    1. Annie20 February 2023 at 12:40

      Agreed. I think we need 2-3 years to get things back to normal and a few encouraging signs (while good) are not enough to warrant excitement. Not yet, at least.

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