BoE's Waning Confidence in Surveys: Shifting Focus to CPI and Average Earnings
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The BoE is losing confidence in these surveys
But June’s decision to lift rates by 50 basis points, having been hiking more gradually over recent months, showed that the wider BoE committee is losing patience and confidence in these forward-looking measures. The hawks would point to the survey question on "price growth", which shows firms consistently predicting inflation to be lower than what is actually realised, as the chart below demonstrates. The Bank has also produced interesting research showing that firms are resetting prices more regularly than in the past, which the hawks could argue shows that inflation is more ingrained than it once was.
The reality is that the Bank is likely to pay less attention than usual to these surveys, and we think the next few policy decisions will be guided by CPI inflation, and to some extent average earnings, and not a lot else. We’ll get fresh data on the latter next week, and it looks like regular pay growth (which excluded volatile bonuses) will stay either flat or a touch lower on a year-on-year basis. The key question is whether the recent re-acceleration in pay growth is largely a function of the higher National Living Wage, or whether it reflects renewed underlying momentum in wage setting.
Realised price growth has typically been higher than what firms had expected
When it comes to CPI, we expect to see the headline rate dip to 8% in June’s numbers from 8.7% currently, and down again to 6.5-7% in July. But that’s mainly a function of lower electricity/gas prices and a reflection of the sharp rise in petrol prices we saw at the same time last year. We’d expect services inflation to notch slightly lower over the summer, but probably not enough to prompt another change in strategy among committee members.
We therefore expect a 25 basis point rate hike in August and another in September – and we certainly wouldn’t rule out more. But ultimately we think the surveys, including the Decision Maker Panel, do contain some useful signals. And by November, we think the committee will have more confidence that inflation is indeed easing, to enable it to pause its rate hike cycle.
