Experts are warning over a winter surge in Covid-19 cases. Winter is unlikely to be smooth. Alongside the delta variant, many UK households are facing a difficult mix of rising energy and food prices and higher taxes.
The jobs numbers provide a test for the BoE: the latest labour market figures suggest that the economy is fast approaching its NAIRU. UK business investment is lagging too: without the jump in productivity, and the cushion of wider margins, UK companies may be less able to absorb upward pressure from wages.
But there are many reasons for the Bank to remain cautious. Timely ONS data on debit and credit card usage suggests the inflation spike is not demand-led. If price pressures are supply-induced, and the supply shortages eventually resolve, then it makes sense to ‘see through’ the recent price gains.
There are global headwinds too: China is slowing considerably.
This commentary has been upbeat about the prospects of the UK economy and the strength of the labour market figures. It is right that the market has caught up to price in an earlier rate hike. But concerns over the delta variant and China suggest that a BoE rate hike in mid-2022 remains more likely.
