A sequence of economic data – due out in the UK this week – will shed more light on the toll being exacted by the Brexit-driven slump in sterling.
UK inflation data – due out on Tuesday – and wage numbers on Wednesday will also determine whether the Bank of England opts to lift interest rates off the floor or wait for better clarity on Brexit.
Inflation, which was an anaemic 0.3 per cent just a month before last year’s referendum, is expected to be in and around 2.7 per cent for July, according to forecasters, marginally up from 2.6 per cent in June, but down from the near four-year high of 2.9 per cent recorded in May.
The sharp drop in the value of sterling since the referendum has driven up the cost of imported goods, especially food imports, resulting in a sharp acceleration in price growth. The Bank of England expects inflation to peak at 3 per recent later in the year.
Economic fortunes
On Wednesday, we’ll also get a glimpse at wage growth and whether it is keeping pace with inflation, or if incomes are in fact falling in real terms. The disparity between the two numbers will have a crucial bearing on the UK’s economic fortunes.
The fear is that if the gap between inflation and wage growth gets too wide, consumer spending – the engine of the economy, which has been relatively robust to this point – will begin to slow, stalling economic growth.
Many economists believe wage growth may have stalled in the three months to June as firms defer pay hikes amid uncertainty over Brexit.
A survey released on Sunday showed British employers expected to raise pay only minimally over the next 12 months despite hiring more staff, suggesting wage growth will remain a problem for consumer spending.
Normally a level of inflation above the bank’s 2 per cent target rate would prompt action in the form of an interest rate hike. However, the bank is understandably worried an increase in rates may accelerate a slowdown in consumer spending.
