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THOUGHTS ON THE GILT MARKET FROM AMP

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Investors in the UK gilt market have a barrage of domestic economic data to contend with this week. ...
Investors in the UK gilt market have a barrage of domestic economic data to contend with this week.

Released yesterday were January's input and output prices, rising much further than the market had expected and rekindling concerns about the pace at which inflationary pressures are building in the British economy.

UK output prices rose 0.9%, taking the annual increase to 3.4%, compared with expectations of a 3% year on year rise. This would suggest that manufacturers are trying to push through a wide range of price rises and the gilt market has reacted negatively to this news.

It appears that higher commodity prices are beginning to feed through the production chain, with fairly grim news on producer input prices, rising 1.3% in January, taking the y/y growth to 11.6%.

Analysts now await January's retail price inflation figures, released tomorrow.

Though it is still not clear if retailers can pass on price rises to consumers, the markets are likely to become increasingly nervous about inflation this year. The underlying inflation rate, excluding mortgage interest payments, is expected to have risen from 2.5% to 2.8% in January, boosted by the tax effects of December's mini-budget.

However, the gilt market may take the inflation news in its stride, given that unit wage costs are still expected to be down on the year, and the fact that the government has already tightened monetary policy this month in response to initial evidence of inflationary pressure.

Also released tomorrow are January's retail sales figures. Although the annual rate of increase is expected to have fallen, (as a particularly sharp rise in January of last year drops out of the comparison), a monthly rise of 0.3% is expected to confirm an upward trend reflecting the current momentum in the consumer sector.

January's Public Sector Borrowing Requirement, released on Thursday, is expected to show a substantial surplus boosted by corporation tax receipts. This could provide some reassurance to the gilt market, after what is expected to be a week of new inflationary evidence.

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