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CBI Economic Update

30 Sep 2016

Having edged up in June and July, headline CPI inflation was stable at 0.6% over the year to August, against consensus expectations for a slight uptick to 0.7%. The main upward pressure on headline inflation came from rising food prices and air fares, and a more moderate fall in the price of motor fuels than a year earlier. But these were offset by downward contributions from accommodation, alcohol and clothing prices.

Input prices - the cost of goods bought by UK manufacturers - climbed to 7.6% in August from 4.1% in July, the highest since December 2011. Underpinning the acceleration was a rise in imported raw material price inflation to 9.3% from 6.2%; a sign that the depreciation of sterling is starting to stoke inflationary pressure. Meanwhile, factory gate prices rose by 0.8%, up from 0.3% previously, suggesting that these cost increases are being passed on.

As expected, the Monetary Policy Committee kept monetary policy unchanged in September: voting unanimously to keep interest rates at 0.25%, and to continue with its £60bn purchases of government bonds and £10bn of corporate bonds. While the MPC acknowledged that data on a near-term economic momentum had surprised to the upside, they continue to expect a material slowing in GDP growth in the second half of this year and in 2017.

Core retail sales volumes - excl. automotive fuel - fell by 0.3% month-on-month in August, following a 2.0% rise in July. On an annual basis, core retail sales were up by 5.9% in August, from 5.8% in July. The slight fall between July and August was mainly driven by the non-food sector, where volumes were down 1.9%, following a rise of 3.6% in July. The largest contributions to the decline in the non-food sector came from falls in sales of household goods (-5.3%) and textiles, clothing and footwear (-3.3%).

According to the latest Labour Force Survey, the number of people in employment increased by 174,000 in the three months to July 2016 compared with the three months to April. The employment rate rose to 74.5%, the joint highest since comparable records began in 1971. Unemployment fell by 39,000, pulling down the unemployment rate to 4.9%, lower than before the financial crisis (5.2%) and the lowest since mid-2005. Annual growth in regular pay (excl. bonus) in the private sector, was 2.3% in the three months to July, down from 2.5% from to the three months to June.

The CBI’s monthly Industrial Trends Survey (ITS) showed that output continued to expand at a healthy pace (+11%) in the three months to September. Looking ahead, firms expect the rate of production to accelerate rapidly (+22%), with 11 of the 18 sub-sectors upgrading their expectations for output over the next three months. Export order books weakened slightly (-10%), but remained comfortably above their long-run average, whereas total orders remained unchanged from the previous month (-5%).

For more information please contact alpesh.paleja@cbi.org.uk

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