The game of anticipating when the Bank of England will start raising interest rates is in play again today with the update on consumer price inflation for the UK. In the US, the focus will turn to the housing sector, which has been wobbly lately. Today’s update on new residential construction will give fresh data for revising expectations — upward, according to the crowd. In addition, the weekly release on chain store sales will provide additional data for assessing last week’s flat retail sales report for July.
UK: Consumer Price Index (08:30 GMT) Weak wage growth in the UK has been considered as a sign that the BoE will delay any decision on raising interest rates. But BoE governor Mark Carney recently noted that weak wage growth alone may not prevent the central bank making a decision on policy tightening. “We have to have the confidence that real wages are going to be growing sustainably” before raising interest rates, he told The Sunday Times. But Carney added that “we don’t have to wait for the fact of that turn to do so.”
Such a move may prove controversial if the recent decline in wages continues. In the June employment report, total pay contracted by 0.2% (based on the three month average). That’s the first decline since the recession of 2009. (So-called regular pay, which excludes bonuses, rose by 0.6% in the most recent three-month period.) Inflation, meanwhile, picked up in June, rising at a 1.9% year-over-year rate — the largest increase since January.
Would the central bank really raise rates at a time of falling wages and accelerating inflation? Probably not, but Carney’s comments suggest that the BoE is focused on expectations rather than the trailing data. In any case, the central bank has signalled that it’s still on track to begin tightening sometime in the first half of 2015.
Today’s monthly inflation report from the government will be closely read for clues on how, or if, it's timely to revise guidance for the central bank’s policy outlook. In its quarterly inflation report published last week, the BoE said it expected that consumer inflation would remain in the 2% range for the foreseeable future. In fact, the consensus forecast is that the annual pace of inflation will slip slightly to 1.8% for the year through July from the previous figure of 1.9%. If the crowd is right, the case for expecting the first rate hike later rather sooner will get a boost.
“In terms of our broader message, and where the committee is united and has the same view, is that as the expansion continues, rates are going to go up,” Carney told The Times. “People might have different views on the exact timing, but it will happen and people should plan accordingly.” 
US: Chain Store Sales (11:45 GMT) Retail spending was flat in July, dealing a setback to the consensus forecast of a 0.2% gain. Some pundits see this as a negative sign, but the fact that the year-over-year trend for retail sales remains at a moderate 3.7% suggests that the latest wobble may be just noise.
One clue for thinking that consumer spending will still rise at a moderate pace in the near term is the relatively stable annual increases in chain store sales in recent months. Spending compared with the year-earlier period has increased by about 3-4% since June in the weekly updates.
Last week’s release was soft, however, with the annual change slipping to just 3.2%, or near the low end of the pace we’ve seen so far this summer. But with payrolls posting a relatively strong rate of growth in recent months, the outlook for consumption is still healthy. Moreover we are now in the back-to-school season, which has traditionally coincided with a boost in spending.
“I expect sales for August to show a healthy gain of 4-5% — a notable improvement over the 3.6% gain in August 2013,” said a researcher at the International Council of Shopping Centers, the group that publishes the chain store sales data.
US: Housing Starts (12:30 GMT) The housing sector has been a weak point for the US economy this year. The overall profile hasn’t been terrible, but there’s been a substantial deceleration compared with last year’s recovery phase. The data suggests that the housing market is still expanding, but at a slower pace, and some analysts worry that deeper troubles lie ahead.
Today’s update on new residential construction for July will be widely followed as the markets look for insights into what may happen in the rest of the year. Yesterday’s report on the mood in the home building industry indicated that modest growth is still a reasonable forecast. Builder confidence for new single-family homes rose again in the August reading: the National Association of Home Builders (NAHB) Housing Market Index for this month increased to its highest level since January. “As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market,” NAHB chairman Kevin Kelly said in a press release.
The improving sentiment suggests that the July update to be released today will show a rebound in new residential construction following two straight months of decline. Economists are also looking for an upbeat report. The consensus prediction is that housing starts for July will reach an annualized rate of 963,000, which is a handsome improvement over the previous month’s figure of 893,000. My econometric modeling also points to a stronger number today, albeit below the consensus forecast. Suffice to say, expectations are widespread that construction is set for a decent revival. If that turns out to be overly optimistic, it may be time to downsize even modest expectations for housing.