SWIP rounds up the week's economic developments

UK CPI inflation unexpectedly jumped from 2.8% to 3.1% in March, chiefly as a result of temporary factors that should unwind in coming months. For example, annual milk price inflation jumped from 0% to 5.3% and there was a record monthly increase in furniture and furnishing prices of nearly 10% on the month. Although this latter figure could reflect strong demand, it's likely to be at least partly explained by the timing of the survey in relation to Easter. Mervyn King's letter to the Chancellor (which he is required to write if inflation moves by more than 1% away from the 2% target) played down the significance of the latest increase in inflation, noting that some of the contributing factors may turn out to be temporary.

David Millar, Head of Bond strategy at SWIP comments on UK inflation: " The latest inflation figures are over 1% above target, which strengthens the case for a further rate rise and we expect the Monetary Policy Committee to announce a rise to 5.5% next month. We said at the start of the month that it was too early for homeowners to breathe a sigh of relief that UK interest rate rises were over.

" Looking at the UK economy, it still remains very robust, driven by business investment and to a lesser extent consumer spending. However there are some very tentative signs that the housing market is starting to respond to higher interest rates; and exports may slow in lagged response to the strengthening of sterling over the last year. Overall we forecast a modest slowing of growth over the remaining quarters of this year and expect that year average growth in 2007 will match the 2.7% recorded in 2006, before easing to 2.5% in 2008, which is a little above the consensus but moderately below the official projections outlined by the Treasury. We continue to expect that CPI inflation will fall back sharply from April onwards, and indeed cuts in heating fuel charges may see a drop in CPI inflation to around 1.75% near year-end."

United States

A surprisingly small increase in core CPI inflation in March (+0.06% on the month) provided some relief after relatively high figures in the preceding two months. The annual rate of core CPI inflation has now fallen from a recent peak of 2.9% last September to 2.5%.

There was also some encouraging news on the inflation front from the Philadelphia Fed and Empire manufacturing surveys, which both showed manufacturers struggling to pass on higher input costs. Warm weather depressed overall industrial production in March but manufacturing production was strong, rising by 0.7% on the month. This sits at odds with recent surveys, which show continuing weakness in the sector.

Euroland

In a quiet week for economic data, the German ZEW survey of confidence among financial analysts once again beat expectations. This survey was wrong-footed by the VAT hike and still has a lot of catching up to do with the Ifo.

Japan and China

In Japan, the February tertiary industry activity index, which evaluates the monthly change in output produced by Japan's service sector, was strong with a 1% rise on the month and a decent increase likely on the quarter. Chinese GDP was much stronger than expected in Q1, rising by 11.1% on the year. Together with an unexpected jump in CPI inflation to 3.3% in March, this raises the likelihood of further interest rate hikes and other measures to cool the overheating economy.

Sebastian MacKay, Economist, at Scottish Widows Investment Partnership (SWIP) to 19 April 2007.