UK CBI Retail Survey Continues to Deflate Messy-nomics

It’s telling when an organization like the CBI says that the expected January reading of -5 still corresponds to an annual volume increase of 2.5%. But the result of December is the weakest in a bit over one year (since Nov 2006). The expected sales for January are the weakest since April of 2006. This is not Draconian weakness but then a look at the plots in this report and an application of the ever-reliable straight-edge forecast rule gives an idea of where we might yet be headed. Then again, straight edge forecasts are always wrong at some point, the only question is: when? Soon or later on? For the moment, momentum is gone and financial fragility – or even turmoil - is still with us. The BOE is worried enough to have cut rates even with a forecast that sees an inflation overshoot into 2008. In an era when the central banking mantra is "cement and anchor inflation expectations", this is indeed a bold step by the central bank. Of course the times are odd since there is even talk from the PM himself that doesn't rule out a nationalization of Northern Rock. The times they are a-changin’, aren’t they?

The level of the readings in the chart make a telling comparison with where they have been in the previous two years and THE LEVELS speak of current strength -- or better put -- current momentum. But the steadiness of the slippage is yet another signal and it forms a dark side of that momentum that sounds a warning for the times ahead. The expectations for sales and orders in January are off sharply from December and in truth it is hard to know what to pencil in for February and that is the number that policy must look to at the moment to sort out the mess. Is January a rogue and outsized drop? Will February reverse it? Will February worsen on trend? These are things we do not know, and as Inspector Clouseau of Pink Panther fame reminds us: ‘we do not know what we do not know’. So policy must have its hunch and make its deal with the devil. The question is, of course, which devil? The CBI report is decidedly mixed and the trend is a call to action. But it is not clear that the BOE has the wherewithal to answer it, despite having cut rates once already. It is also far from clear what action is called for.