Economic Highlights

January’s data on the public finances showed that the government ran a surplus of £2.9bn during the month. Consensus had been for the public sector to be in the black to the tune of £3.5bn. Revisions to recent months’ data were favourable. The fact that borrowing was negative exaggerates the improvement in the fiscal position; January tends to be a buoyant month for receipts thanks to the strength of PAYE income tax payments. Nonetheless, this was the first repayment since the onset of the pandemic two years ago and the overall position is evolving favourably. Taking the ten months of 2021/22 so far, central government spending has declined by 4.9% on the corresponding period a year earlier, while revenues (excluding receipts from the Bank of England’s Asset Purchase Facility) are 15.6% higher. Across this timeframe, the deficit is some £140.2bn below where it was a year ago, which if maintained in February and March, points towards borrowing of £154bn this financial year against £322bn last. At the time of October’s Budget, the Office of Budget Responsibility concluded that the government was on track to meet its proposed new fiscal rules. This assessment was based on a borrowing forecast for 2021/22 as a whole of £183bn. With today’s figures continuing to build a case to expect a substantial undershoot, the government is likely to be on course to have sufficient resources to either cut taxes before the next election, to provide further help for households to manage their energy bills if it considers this to be necessary, or even a combination of both.

US economic data released on Friday was generally better than expected and cited as part of the reason behind the market’s positive attitude. Personal Income (flat month-on-month) and Personal Spending (+2.1%) both beat expectations, as did Durable Goods orders, which rose 1.6% at the headline level despite an upward revision to December’s figure. The University of Michigan’s Consumer Sentiment Survey saw improvements in both the headline and expectations components, with a small drop in inflation expectations also seen as encouraging. And while the Core PCE Deflator (sometimes seen as a more accurate measure of inflation) rose from 4.9% to 5.2% year-on-year, the highest reading since 1982, that was no higher than forecast.

Annual inflation was confirmed at a final headline figure of 5.1%, although the core number, which strips out volatile food and energy prices, was a much more benign 2.3%. Even so, such core numbers above 2% have only been briefly experienced (in early 2002) since the inception of the euro. The market has already brought forward significantly the date at which it expects the European Central Bank will start to raise interest rates, and ECB members are more reluctant to push back on those expectations now. The Ukraine crisis will only put more pressure on the bank.

The government and central bank in Tokyo have been dreaming about higher inflation for years and now they finally have it. However, unlike policy bodies elsewhere in the world, they would probably prefer to keep the headline number and dismiss the core. Headline Consumer Prices rose 1% year-on-year in the latest release, but the core reading (again stripping out food and energy) was still negative at -0.6%. Whether the headline figure catalyses some increases in wages remains to be seen, but higher pay would be generally welcomed.