UK RECESSION RISK JUST GOT A WHOLE LOT SMALLER AFTER INFLATION UNDERSHOOT

Since January

WHAT I’M READING

Beijing is very clearly worried about the health of the Chinese economy. In the readout from its latest Politburo meeting, the word risk was mentioned seven times, up from three times in April, as Julian Evans-Pritchard, head of China economics at Capital Economics, noted. Domestic consumption is fraying. The property sector is teetering. Record high youth unemployment is a worry. All this is translating into underperforming growth in the world’s second largest economy. GDP expanded 6.3 per cent in the second quarter yearly, but growth was much slower at 0.8 per cent when compared to Q1.

by markets buttering the Bank of England up for fewer interest rate rises.

Peak rate expectations have fallen to 5.75 per cent from 6.25 per cent. Moneyfacts data shows banks have already responded to that climbdown by lowering rates on two-year and five-year deals.

That should smooth what has already been a shallower-than-projected knock to incomes. According to the Resolution Foundation, living standards fell just 1.8 per cent over the last year compared to the Office for Budget Responsibility’s 3.8 per cent projection, a difference of £28bn. Though consumer spending will invariably drop, the slide may be flatter, arresting higher unemployment and lower economic growth.

However, another sizable dent to inflation is required to justify the conviction that it has finally been defeated. As Nomura pointed out, monthly services prices are still rising faster than their long-term average. Wages are also accelerating quickly at 7.7 per cent in the private sector.

It would be stupid for Bailey and the rest of the Monetary Policy Committee to leverage one set of numbers to determine their next rate decision.

Instead, they will focus on the data as a whole. Though less likely, don’t be surprised if they opt to repeat a larger 0.5 percentage point rate increase on 3 August.

Just as people cautioned one piece of hotter-than-feared inflation data shouldn’t spark doom and gloom, one piece of good data needs to be welcomed with caution.