Inflation Data and Bank of England Minutes Are Key U.K. Economic Events for Week Beginning 16 November

Meanwhile, core consumer price inflation is seen edging up to1.8% in October from 1.7% in September. In addition, annual underlying retail price inflation is expected to have climbed to 1.9% in October from 1.3% in September. The year-on-year decline in headline retail prices is seen narrowing to 0.8% in October from 1.4% in September, with deflation still being the consequence of mortgage interest payments being much lower than a year ago.

Consumer price inflation is likely to rise markedly further over the next few months, as it is pushed up by ongoing unfavourable base effects resulting from the substantial falling back in oil prices in the final months of 2008 and early months of 2009, as well as last December's value-added tax cut from 17.5% to 15.0% dropping out of the calculation. Furthermore, VAT will rise back up to 17.5% in January. Consequently, consumer price inflation could very well rise above 2.0% before the end of this year and reach 2.5% in the first quarter of 2010. We expect inflation to ease back, thereafter, as base effects become less unfavourable and underlying pressures are contained by substantial excess capacity, muted recovery, wage moderation and the need for retailers to price competitively in the face of still limited consumer spending.

Also out on Wednesday are the minutes of the November meeting of the Bank of England's Monetary Policy Committee (MPC). At the meeting, the MPC decided to extend the central bank's Quantitative Easing programme by a further £25 billion to £200 billion and to keep interest rates down at a record low of 0.50%. The subsequently released Bank of England Quarterly Inflation Report for November indicated that the MPC was influenced in further extending Quantitative Easing by ongoing concerns about the strength of the recovery and the belief that substantial excess capacity will contain consumer price inflation over a two-year period.

The general impression we get is that further Quantitative Easing cannot be ruled out, but is unlikely unless the economy suffers a major relapse in 2010. The minutes of the MPC meeting may throw more light on this. In particular, it will be interesting to see if all nine MPC members were in favour of the £25 billion extension in Quantitative Easing that was enacted at the meeting, or whether any wanted a larger increase or, alternatively, the programme to be halted.

The Confederation of British Industry (CBI) industrial trends survey for November (out on Wednesday) is expected to show improvement, thereby reinforcing belief that industrial production is on course to expand in the fourth quarter for the first time since the fourth quarter of 2007. Latest hard data show that industrial production bounced back pretty well in September, after plunging in August due to factories closing for a summer break, while October survey evidence from both the CBI and, especially, the purchasing managers was significantly more upbeat overall.

We expect the CBI survey to reveal that the balance of manufacturers reporting that their orders are at normal levels climbed to -45% in November from -48% in October and a 17-year low of -58% in March. There could also be further improvement in the balance of companies expecting output to rise over the next three months. This rose to a 19-month high of +4% in October.

In the near term at least, manufacturers should benefit from sharply reduced stock levels, as well as from the weak pound helping exporters in addition to making U.K. manufacturers more competitive in their domestic markets. On top of this, domestic demand is picking up at least temporarily in important overseas markets including the Eurozone and the United States, while the survey evidence indicates that it is also improving at home. Nevertheless, serious doubts remain about the strength of demand for manufactured goods over the medium term, particularly once stimulative measures start being withdrawn.

Retail sales (out on Thursday) are forecast to have picked up appreciably in October, after volumes were disappointingly only flat month-on-month in both September and August. Specifically, we are looking for an increase of 0.7% month-on-month in October, which would push the year-on-year increase up to 3.1% from 2.4% in September. Already released survey evidence for October from both the British Retail Consortium and the CBI showed marked improvement.

Low mortgage payments and reduced inflation are boosting the purchasing power of a good many people, thereby giving them scope to step up their discretionary spending. Even so, the suspicion remains that the upside for consumer spending will be limited for some time to come as consumers still face serious obstacles. These notably include high and rising unemployment, low and slowing earnings growth, and heightened debt levels. Furthermore, many consumers are keen to limit their expenditure due to still serious concerns about the economy and their jobs, as well as the need/desire to improve their personal finances. Consumers will also be wary that further out they are very likely to face higher taxes as part of the major corrective action that will be needed to rein in the terrible government finances. Meanwhile, credit conditions facing consumers are still tight. Furthermore, value-added tax will rise back up from 15% to 17.5% in January, although this may very well lift retail sales over final weeks of 2009, as consumers look to beat the VAT hike. Sales of big ticket items seem particularly likely to rise ahead of January's VAT hike

The public finances for October (also out on Thursday) will undoubtedly once again make for worrisome reading and highlight the very difficult task that whatever political party is in power after next year's general election will face in reining in the bloated deficits. Tax revenues continue to be hammered by the recession, weakened corporate profitability, elevated and still rising unemployment, markedly reduced bonus payments, last December's value-added tax cut, and still relatively muted housing market activity. Meanwhile, markedly higher unemployment is also resulting in increased benefit claims, thereby pushing up government expenditure. Consequently, we expect the Public Sector Net Borrowing Requirement (PSNBR) to have jumped to £6.0 billion in October from £122 million in October 2008.

By Howard Archer