The first big data dump of 2023 in the coming week is set to unveil more clues on whether the UK economy entered a recession in the final months of last year.
City traders are hoping fresh inflation figures out on Wednesday from the Office for National Statistics (ONS) will show price pressures are still easing.
The consensus forecast is for the rate of price growth in the UK to have dropped to 10.5 per cent in December, down for the second month in a row from 10.7 per cent after October’s 11.1 per cent peak.
Another slide in the inflation rate will raise hopes that it is on course to gradually fall throughout 2023, reinforcing signs from last week’s stronger 0.1 per cent GDP growth figure for November that the UK’s recession could be reasonably mild.
“Core goods inflation will also likely show another soft print as weaker demand continues to dampen price pass- through. And we expect to see food inflation slowing too — in line with recent survey data,” Sanjay Raja, senior UK economist at Deutsche Bank, said.
The better than expected GDP numbers helped bump the FTSE 100 to near its all time high of just over 7,900 last week.
FTSE 100 is closing in on its all time high
Rate setters at the Bank of England are probably going to pay closer attention to Tuesday’s ONS jobs market and unemployment numbers for November to try and unearth clues on whether inflation could stick around.
Private sector pay growth has raced to a multi-decade high due to workers demanding employers step up wages to offset the cost of living crunch.
This has raised businesses’ costs substantially, raising incentives for them to hike prices to maintain margins, heightening the risk of an inflationary spiral emerging.
“With inflation dialling back, the lagged response on wage growth has been worrying for the monetary policy committee,” Raja added.
Governor Andrew Bailey and co are expected by markets to send interest rates to a peak of under 4.5 per cent, a huge climb down from the more than six per cent pencilled in after Liz Truss’s September mini budget.
Bailey will provide more clues on whether he intends to back a 50 basis point rate jump at the MPC’s next meeting on 2 February during a grilling session by MPs on the treasury committee tomorrow at 3pm.
The Bank is walking a tight rope between tackling inflation without pushing the UK into recession.
New ONS retail sales data for December, to be published on Friday, could confirm more timelier data from other providers that signals spending is wilting in response to real incomes being squeezed by higher living costs.