Data expected to show rising inflation, falling real pay despite record employment, and first annual drop in retail sales in almost five years

The chancellor, Philip Hammond, is to receive some crucial evidence about the health of the UK economy this week as he puts the finishing touches to one of the most difficult budgets in recent times.

Official figures are expected to show the squeeze on household finances has intensified in recent weeks, as wage growth fails to keep pace with inflation despite low unemployment.

Economists polled by Reuters are predicting official figures out on Tuesday will show inflation rose to 3.1% last month, up from 3% in September. Policymakers at the Bank of England expect the rate to have risen to 3.2%, as the impact of a weaker pound since the Brexit vote continues to feed through to higher shop prices.

Any reading above 3% would be the highest for five and a halfyears and would require the Bank’s governor, Mark Carney, to write to the chancellor to explain why inflation is more than a percentage point away from its 2% target.

The exchange of letters will not be made public until 14 December, when the Bank’s interest rate-setting monetary policy committee announces its next decision.

Alan Clark, an economist at Scotiabank, said he expected inflation to have risen to 3.2% last month, with food prices, higher energy bills, clothing and household goods contributing to the increase. But he added that he expected it to begin falling by the end of the year.

“October inflation will almost certainty hit letter-writing territory,” Clarke said. “Why is inflation high? Because of the exchange rate. How long will it last? Five minutes. This is probably the only letter the governor will have to write. Inflation should start to come down by Christmas.”

The rise will extend the fall in real wages, as prices rise faster than pay. Figures published on Wednesday are expected to show the rate of growth in pay, excluding bonuses, was at 2.1% in the three months to September, compared with a year earlier. This would be unchanged from the three months to August. Pay growth including bonuses is also expected to be 2.1%, down from 2.2%.

Pay growth has been persistently weak despite record rates of employment and low unemployment. On Wednesday, the Office for National Statistics is expected to say the jobless rate was unchanged in the three months to September, at a 42-year low of 4.3%.

Britain’s economy is expected to lag behind other large European economies this year, with the European commission last week cutting its UK growth forecast for 2017 from 1.8% to 1.5%. Brussels expects the eurozone economy to grow by 2.2% this year, its best performance in a decade.

A weaker growth outlook for the UK presents the chancellor with a dilemma in the run-up to the budget on 22 November, as households face greater financial pressures and businesses face uncertainty created by Brexit.

Retail sales figures to be released on Thursday are expected to show the first annual drop since March 2013, down 0.7%.

Economists polled by Reuters are predicting a small rise of 0.1% in sales for October, after a 0.8% fall in September. Those at Investec, however, expect a 0.4% drop, reflecting the trend in recent weak business surveys.

“Retailers suffered their worst performance in six months in September as sales volumes shrank 0.8% month on month following a sharp 0.9% rise in August,” said George Brown, an economist at Investec.

“Surveys suggest that another disappointing month is on the cards for Britain’s high street; the BRC [British Retail Consortium] retail sales monitor reported the biggest October drop in like-for-like sales values since 2008, whereas the CBI distributive trades survey indicated that sales volumes had fallen at the sharpest pace since March 2009.

“Consumer spending remains under pressure amid the strain that high inflation is currently placing on household finances. Nevertheless, our forecasts suggest consumer price inflation may have peaked, which may offer some respite for retailers further ahead.”

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