Period covered: July 24Published: July 05, 2024Read time: 1min

Economic Monitor

Economic Monitor: Inflation back to target... for now

Economic growth is expected to surprise to the upside over this year, with Q1 growth revised up and a decent pace maintained in Q2, as suggested by the Purchasing Manager's Indices. Average earnings have beaten inflation since the end of the pandemic, helping to hold up consumer spending. The BRC Customer Sentiment Monitor for June suggested a slight decrease in consumer optimism though consumers did reveal they would be maintaining their spending over the coming month.

The Consumer Price Index finally returned to the 2% target, which implies faster real wage growth over Q3. However, recent movements in natural gas prices suggest that the housing and energy component of inflation may begin to push up on inflation, raising the possibility of the CPI being above the Bank of England’s target by year-end. Services inflation continues to remain elevated, though in contrast deflation in goods persisted, suggesting interest rate cuts this year may be limited and the bulk of any cuts pushed to 2025.

Supply-chain conditions are fragile, and commodity prices have slowly inched upwards over recent months. Shipping costs continue to rise as a result of the conflict in the Middle East, and the route from Shanghai to Rotterdam has seen a particularly strong price rise, with the spot rate now 458% higher on the year, unlikely to fall much further back absent an end to the conflict. Hence business input costs will remain high and this is likely to result in ~1% inflation passed down the supply chain.