3 Important Things We Learned About the U.K. This Week

This has been quite a week for the U.K., hasn’t it? We were hit with heavy releases almost day after day! But before we bid this week adieu, let’s recap the things we learned about the U.K. economy over the past few days:

1. U.K. CPI fell to its lowest level in over two years

Headline CPI (which measures the change in consumer prices) clocked in at 2.8% last month, down from 3.0% in April. Not only is this below the 3.0% that many had predicted, but it also marks the index’s lowest level since November 2009.

Food and energy prices led the decrease, as they were dragged down by the continued decline in oil prices. For those of you who haven’t been tracking the black crack markets, oil prices have already fallen over 20% since the start of May! If we were to exclude food, energy, tobacco and alcohol from the picture, consumer prices would actually be up 2.2%, compared to 2.1% in April.

Though current inflation levels are still well above the Bank of England‘s 2% target, the outlook for consumer prices seems to favor a further decrease. As a matter of fact, BOE Governor Mervyn King sees inflation falling within its target by the middle of next year… and I can’t say I disagree! After all, oil prices are still dropping and there still seems to be a lot of slack in the economy.

2. More policymakers support QE

On Wednesday, we got a peek at the latest MPC meeting minutes, which revealed a major divide in the BOE. Apparently, the last time that policymakers came together, they were split on the issue of more stimulus. The committee voted 5-4 against pumping more money into the economy.

It seems the case for easier policy has grown stronger over the past couple of months, as most MPC members already acknowledge the economy’s need for a boost. According to the minutes, policymakers have become increasingly worried about global economic conditions, specifically citing the euro zone debt crisis’ threats to the U.K. economy.

Surprisingly, Mervyn King himself now favors more easing, as he joined Adam Posen and David Miles by voting to bump up stimulus another 50 billion GBP. On the other hand, Paul Fisher called for a more modest increase of 25 billion GBP, while the remaining five members of the committee voted to keep the central bank’s asset purchase facility at 325 billion GBP.

3. Retail sales up more than forecast

Last month, U.K. retail sales posted a 1.4% increase to beat forecasts which called for a growth of just 1.2%. But considering April’s 2.4% decline, the rebound in May was nothing spectacular.

As it turns out, sales were driven mostly by heavy discounting. I don’t know about you, but I personally don’t expect this to drive growth for an extended period of time. Retailers would probably go out of business if they granted big discounts all year round!

Also, it appears as though consumers are still suffering from low confidence. According to studies by Kantar Retail, although the latest sales figures came in better than expected, retailers reported that they are still having a hard time getting shoppers to spend their hard-earned dough!

Tying it all together

The unexpected dip in inflation basically gives the BOE more room to ease and was probably a big factor in policymakers’ decision to vote for more stimulus. As for retail sales, though we saw a better-than-expected rebound from April’s dismal sales figures, last month’s performance was still far from impressive.

So all in all, while we can’t say with certainty that we’ll see more quantitative easing next month, we can’t deny that the reports released this week significantly bump up the chances that we’ll see some form of easing in July.

The question we must ask ourselves now is, “is the prospect of more stimulus enough to keep the British pound grounded?”