Week Ahead: Is hot UK inflation here to stay?

Quite a lot to look out for in terms of big data this week. First up, we have UK CPI data. Is inflation sticking around for longer than we thought? UK and EU flash PMIs come too at a time when it looks like economic activity is starting to slow down. It’s also US earnings season with leading tech players reporting in. 

UK CPI: circling hawks and hot prints 

On the data front, one of the week’s big releases are the latest UK Consumer Price Index numbers. 

September’s print showed that UK inflation had far exceeded the Bank of England’s 2% target in August. Consumer prices surged by 3.2% in the twelve months up to that month official data showed – the highest month-on-month increase since records began in 2017. 

The Office for National Statistics said the surge was “likely to be a temporary change” and flagged the government’s Eat Out to Help Out (EOHO) scheme may have been a contributing factor to the jump. 

“In August 2020 many prices in restaurants and cafes were discounted because of the government’s Eat Out to Help Out scheme, which offered customers half-price food and drink to eat or drink in (up to the value of £10) between Mondays and Wednesdays,” the ONS said in its statement. 

“Because EOHO was a short-term scheme, the upward shift in the August 2021 12-month inflation rate is likely to be temporary.” 

The official line has been that higher prices are transitionary – but voices from within the Bank of England warn it could be here for longer than first thought.  

The BoE’s new Chief Economist Huw Pill has said he believes hot inflation could be sticking around. 

“In my view, that balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated,” Pill said in September. 

Pill lends his voice to the hawkish chorus steadily building in the Bank of England’s council. A number of MPC members are calling for a rate hike early next year. As such, another high CPI print in September may lead to a turning up of the volume from the hawks. 

PMI rush to signpost economic slowdowns? 

It’s also the time of the month when flash PMI scores start landing thick and fast. 

British and EU data is released this week off the back of last month’s reports which indicate growth is slowing in these two major economies. 

Let’s start with the UK. The IHS Markit flash composite for September indicated output had dropped to the lowest level since February. The UK’s score came in at 54.1 that month, slipping from 54.8 in August. 

Recovery appears to be stalling as we head into the winter months. Lower economic activity matched with higher inflation does not create the most positive of outcomes for Britain’s economy going forward.  

The PMI for the services sector fell to 54.6 in September from 55.0 in August, its lowest level since February when Britain was still in lockdown. Manufacturing fell from 60.3 to 56.4, which is again the lowest level since February. 

It’s the same story across the Channel. European growth was stymied by supply constraints pushing input costs the 20-year highs throughout the EU last month. Will this month’s PMI data show the same? 

In terms of scores, the IHS composite reading showed economic growth had dropped to a five-month low in September. The EU scored 56.1 that month against 59.0 in August. 

This was well below market forecasts. A Reuters poll indicated economists and analysts believed output would slow, but at the much lower rate of 58.5. 

Supply line squeezes coupled with a general slowing of GDP growth appear to be the main factors here. The EU economy is approaching its pre-pandemic size, so a slowdown was always on the cards, but not one quite so drastic. 

I would expect to see a lower EU PMI print on Friday when the latest data lands. 

Wall Street earnings keep on coming – enter the tech stocks 

Next week, we’ll be in the thick of it when it comes to Q3 earnings season. Big banks, including Goldman Sachs, Citigroup, and JPMorgan, kicked things off for us last week. Now, it’s the turn of some big tech mega caps to share their latest financials. 

Netflix and Tesla are the two headliners to watch out for this week. Both reported strong Q1 and Q2 figures but have advised performance may start to drop off in 2021’s third quarter. 

For more information on which companies are reporting and when be sure to check out our US earnings season calendar. 

Major economic data 

Date  Time (GMT+1)  Asset  Event 
Mon 18-Oct  3:00am  CNY  GDP q/y 
  3:00am  CNY  Retail Sales y/y 
  2:15pm  USD  Industrial Production m/m 
  3:30pm  CAD  BOC Business Outlook Survey 
Tue 19-Oct   1:30am  AUD  Monetary Policy Meeting Minutes 
       
Wed 20-Oct  7:00am  GBP  CPI y/y 
  1:30pm  CAD  CPI m/m 
  1:30pm  CAD  Common CPI y/y 
  1:30pm  CAD  Median CPI y/y 
  1:30pm  CAD  Trimmed CPI y/y 
  3:30pm  USD  Crude Oil Inventories 
       
Thu 21-Oct  1:30pm  USD  Philly Fed Manufacturing Index 
    USD  Unemployment Claims 
       
Fri 22-Oct  7:00am  GBP  Retail Sales m/m 
  8:15am  EUR  French Flash Manufacturing PMI 
  8:15am  EUR  French Flash Services PMI 
  8:30am  EUR  German Flash Manufacturing PMI 
  8:30am  EUR  German Flash Services PMI 
  9:00am  EUR  Flash Manufacturing PMI 
  9:00am  EUR  Flash Services PMI 
  9:30am  GBP  Flash Manufacturing PMI 
  9:30am  GBP  Flash Services PMI 
  1:30pm  CAD  Core Retail Sales m/m 
  1:30pm  CAD  Retail Sales m/m 
  2:45pm  USD  Flash Manufacturing PMI 
  2:45pm  USD  Flash Services PMI 
  Tentative  USD  Treasury Currency Report 

 

Key earnings data 

Tue 19 Oct  Wed 20 Oct  Thu 21 Oct  Fri 22 Oct 
Philip Morris International (PM)   Verizon Communications Inc (VZ)   AT&T (T)   American Express (AXP)  
       
Johnson & Johnson (JNJ)   International Business Machines (IBM)  Intel Corp (INTC)   Schlumberger Ltd (SLB)  
       
Procter & Gamble (PG)  Tesla Inc (TSLA)   Snap Inc A (SNAP)    
       
Netflix Inc (NFLX)