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Chart 58: The dip in UK policy risk is likely to be short lived if the Govt keeps to its commitment to trigger A50 in Q1 without providing clarity on its negotiating position 1200 4000 ———UK Economic Policy Uncertainty === (German Economic Policy Uncertainty 800 600 400 200 0 1997 1998 1999 2000 2003 2004 2005 2006 2007 2008 2009 2001 2002 2010 2011 2012 2013 2014 2015 2016 Source: Bloomberg Building inflationary pressures point to post-Christmas consumer squeeze The third act in waiting for Brexit is cost-push inflation from the fall in GBP. So far, consumer spending has held up far better than most expected, especially retail spending by the over 50s. But there is evidence the inflationary canary is starting to sing. The charts below show that the move in CPI has lagged sharp rises in manufacturing output prices, utility prices and food prices in the past two months. Chart 59: Firms report sharp increases in Chart 60: Chunky utility price increases on the Chart 61: Food prices are key to watch output prices horizon 14 CPI food prices, 66.0 140 po nae Gane 6 ay 12 BAML forecast, % 62.0 120 4amM4am 40 10 YoY , 100 eqs Natural gas price, spot, Food input prices, % 12m/12m 35 8 % yoy, lagged 3 58.0 80 months {rhs} eum CP utilities, % yoy ( ie 6 54.0 60 4 20 40 15 2 50.0 20 10 0 46.0 0 a 2 ; ; 0 eee anufacturing output prices -20 42.0 (PMI; lagged 3 months) 2 5 at 38.0 ee |ndustrial goods inflation {rhs} 60 45 6 EQs5QgegyQrowon Senza enR2enr oe Oo ke oS — & OD aD dD o oO Oo 2@eeeeS2555ss5 ssgsesEr2Z2e2s SF STFNNANAANAATAAN “SL EM ON a) SOs NNN NN N NN Food input prices calculated as an average of domestically produced and imported food. BofA Merrill Lynch Global Research, ONS. = Q Source: BofA Merrill Lynch Global Research, Markit, ONS. Source: BofA Merrill Lynch Global Research, ONS, Bloomberg To understand this delay it is worth remembering “Marmitegate” and the pressure put on companies not to raise the prices of household brands. The incident also illustrates the margin pressure building up in the system and challenges posed to producers, vendors and consumers as to who will absorb the higher costs. According to the Chairman of the UK Food and Drink Federation many companies may be waiting until post-Christmas to change prices, which lan Wright estimates could rise as much as 8%. If that happens at the same time as power prices hit seasonal highs, the consumer could Start to feel the pinch. To avoid this leading to a contraction in demand, workers we would need to see strong nominal wage growth. However, the Institute of Fiscal Studies does not expect real wages to return to 2008 levels until 2021. The tightness of the UK labour market could also cushion any blow, but we note jobless claims have started to rise again and businesses may be less likely to hire if uncertainty, for reasons outlined above, picks up again. BankofAmerica <2” 28 European Equity Strategy | 01 December 2016 Merrill Lynch HOUSE_OVERSIGHT_014487