Economic preview: UK pieces together BoE rate conundrum

Third-quarter growth reviews across much of Europe are published on Tuesday this week, but much of the focus for UK-based investors will be on the continuing conundrum of Britain's inflation/wage growth gap.

Elsewhere during the week there's plenty of industrial data - both survey-based and hard data. Meanwhile, consumer data is also widespread, with retail sales numbers in the UK, US and China.

Given the Bank of England's recent interest rate move, however, the spotlight will fall on the UK data and its impact on sterling.

UK consumer price inflation (CPI)

Headline CPI rose to 3% in September, from 2.9% in August and is broadly expected to have risen to 3.1% in October - a level that will demand Bank of England governor Mark Carney write a letter of explanation to the chancellor of the exchequer.

In such a letter he will no doubt mention the lingering impact of weak sterling and global demand-driven price rises for raw materials and energy. He'll add that Bank forecasts project that this is where CPI is expected to peak and that inflation will begin its descent back towards the 2% target rate over the course of 2018.

Bank of England governor may have to write to the chancellor this week if CPI tips above 3%: PA Images

Given the withdrawal of recent hawkish rhetoric, however, it's unlikely Carney will be recommending further near-term interest rate increases following the quarter point hike to 0.5% made earlier in November.

"Inflation is set to hit a peak, before tailing off over coming months, and signs of underlying price pressures – chiefly wage growth - are still relatively benign," says James Smith at ING.

The CPI data is published on Tuesday.

UK annual average wage growth

Here's where markets discover the second piece to the conundrum described above. Indeed, over the past months wage growth has remained relatively benign compared with inflation.

At 2.2% in August, the data for September is expected to deliver little change: some analysts see a percentage point rise to 2.3%; some see a similar-sized dip to 2.1%. On average, the same reading as August is expected when the data is published on Wednesday.

If so, this widens the gap between wage growth and inflation, adding to the already considerable pressure on UK households.

UK retail sales

It's important here to look closely at retail sales. If there's a third piece to the Bank's conundrum - this is it.

Retail sales are slowing, but food sales are still increasing - as are prices: Shutterstock

The squeeze on consumers created by the inflation/wage growth gap is beginning to have a noticeable impact on spending habits.

While food purchases continue to drive retail sales - according to recent data from the British Retail Consortium (BRC) - appetite for discretionary items faded at the fastest rate yet seen by the BRC. Meanwhile, several retailers, including M&S, Sainsbury's and Halfords last week reported falling profits.

The official data for October, published on Thursday are expected to confirm tough times in the retail industry, with zero growth in the month and an annual decline of 0.8%.

Taking the three data releases together, it could be a tough week for sterling. The currency is unlikely to find support from the data as the interest rate implications push the timing for a second rate rise further back. For the same reason it could be mildly supportive for stocks, but not likely retail stocks.

US consumer activity

There have been some constraints in the US too. Most notably in the personal consumption expenditures, which is the Federal Reserve's favoured inflation measure and stood at 1.3% in September.

US consumer activity has also slowed a little - meanwhile, Gap reports Q3 numbers this week: PA Images

It has consistently undershot the Fed's inflation target for five years - unlike CPI, which in September rose to 2.2%. Analysts expect the core CPI for October, published on Wednesday, to retreat back to an annual rate of 2% as retail sales have dwindled.

Indeed, the retail sales data for October, published on the same day, are expected to have slowed. Analysts expect a month on month rise of 0.1%, after a 1.6% rise in September.

Eurozone gross domestic product update

No revisions are expected to third-quarter preliminary readings which saw month on month growth of 0.6% pushing annual growth up to 2.5%.

Conformation of this, and some accompanying strong data this week from Germany - including GDP and ZEW - is likely to be supportive of the euro, and both the dollar and pound could come under pressure from the single currency.

The best of the rest

China retail sales and industrial production data for October are published on Tuesday, along with US producer price inflation data and preliminary GDP data from Japan.

On Wednesday, along the UK wage data is the UK unemployment rate and claimant count data. Japanese industrial production data are also expected along with the Empire State manufacturing survey from the US.

US industrial production numbers and the monthly Philly Fed survey are among the data published on Friday.

Corporate earnings

In the US, although the earnings season is slowing down, there's a very retail feel to the week ahead with Burger King reporting on Tuesday and Home Depot on Wednesday. Then Best Buy, Gap and Wal-Mart on Thursday and Abercrombie & Fitch and Foot Locker on Friday.

In the UK, Wal-Mart's UK arm Asda reports on Tuesday along with Firstgroup and Vodafone, while Experion reports on Wednesday. On Thursday it's ICAP, Manchester United and Royal Mail.