The retail data backs us up — the MPC should be cutting

You may remember from a Noise Cancelling episode a few weeks ago the argument we made about the double brake — and the case that what the Bank of England was saying about the inflationary consequences of the Iran war was wrong, especially the so-called second-round effects.

Today's data clearly backs that up.

UK retailers have just reported the sharpest year-on-year decline in sales in more than 40 years as the Iran war raised inflation fears. The BRC shop price index fell to 1% year-on-year in April from 1.2% — 40 basis points less than expected. As the BRC put it: "With weakening consumer confidence, retailers competed harder on price to stimulate more spring spending."

In other words, the MPC should be cutting. And here's why.

The argument we made was straightforward. Ben Bernanke's landmark research showed that it wasn't oil shocks that caused recessions — it was the interest rate hikes that followed. The central bank's reaction did more damage than the shock itself. We called it the double brake: the energy shock hits the economy first, then the central bank raises rates on top. Two brakes on an economy already slowing.

The Bank of England has stalled its cutting cycle — and some are even calling for rate rises — on the basis that the Iran-driven energy shock will feed into wages and prices. That was always the wrong reading. The conditions for a wage-price spiral don't exist in the UK economy. Growth is anaemic. Unemployment is at a five-year high. Vacancies have collapsed below pre-pandemic levels. Wage growth is slowing — and the recent labour market data confirms it. Private sector wage settlements are falling, not increasing, dipping below 3% in February.

Today's retail numbers confirm what those conditions were always going to produce. Consumers haven't responded to the energy shock by demanding more pay — they've responded by spending less. Retailers haven't responded by pushing prices through — they've responded by cutting them. That is the textbook signature of a deflationary economy, not an inflationary one.

The Bank's mandate is to bring inflation back to target. The data is doing that job for them. What the economy needs now is the relief that lower rates would bring — to mortgage holders, to small businesses, to investment.

Every meeting the MPC holds and doesn't cut, it tightens the second brake.