Treasury Talks Tough On Government Spending:

Last week we got to hear a lot about inflation. Price increases of 3.2 per cent are significant and considerably above the Bank of England’s 2 per cent target. So, this is naturally causing some anxiety. Meanwhile, retail sales are slowing and there is now the possibility of some Covid restrictions being reimposed over the winter. So, it is likely we will see the bank continue its wait and see policy.

Elsewhere, news reports suggest the Chancellor is planning his own cover version of a previous hit – fiscal responsibility. The market is currently willing to pay the government to take money off its hands and spend it. So, this feels more like a political move than an economic one. The wording leaked to the press on government spending and borrowing leaves loopholes you could drive a bus through. But, any significant reduction in government spending risks putting a severe dampener on economic growth if consumers and businesses remain unwilling to borrow or invest. Coupled with rising costs in the supply chain, a mis-cue could well see a return to 70’s style stagflation.

Inflation running high but still looks temporary

UK inflation rose to 3.2 per cent in August, reaching its highest level in 12 years. Some of the increase reflects the ongoing recovery from the pandemic. In fact restaurants, hotels and transport costs make up a lot of the increase. Higher housing costs also contributed significantly. These figures also show how the government’s Eat Out to Help Out scheme caused the cost of eating out to fall sharply this time last year. The Bank of England has already said it expects inflation to reach 4 per cent by year end.

The UK inflation rate contrasts slightly with data from the US. Inflation was 5.3 per cent in August, down from 5.4 per cent in July. Inflationary pressures appear to have eased due to a reduction in core indicators such as food and energy. Treasury yields and equities fell as lower inflation diminished the prospects of an early interest rate rise from the US Federal Reserve. Eurozone inflation has followed the UK. It increased sharply from 2.2 per cent in July to 3 per cent in August.

Vacancies pass 1M for first time as furlough due to end

Job vacancies have soared as businesses in the leisure sector fully reopened for the first time since March 2020. As well as bars, restaurants and hotels, a surge of hiring in areas such as transport and retail have helped push advertised vacancies above 1 million for the first time. That’s 249,000 higher than pre-pandemic.

The surge in hiring appears to be down to businesses replacing workers lost or furloughed during coronavirus restrictions rather than due to expansion as the number of salaried employees is still 2.4 per cent lower than in December 2019. The demand for jobs also needs to be seen in context of the government’s furlough scheme. At the end of July there were still 1.6 million employees on the government’s job retention scheme but the scheme is due to close at the end of September. Average earnings to the end of July are considerably higher than a year ago (up around 8 per cent) but this figure has been distorted by the furlough scheme and the number of lower paid workers who lost their jobs last year.

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