Economic Outlook: inflation in focus Inflation will come under closer scrutiny in the coming weeks as many companies look to settle wage claims based on the latest indications. In the UK on Tuesday, consumer price data are expected to show that annual inflation in December dropped for a fourth-consecutive month to 4.2 per cent from 4.8 per cent in November. Retail price inflation is expected to have eased to 4.8 per cent from 5.2 per cent. Although price pressures remain, the Bank of England expects a further easing in the coming months as the 2010 rise in value added tax drops out of the calculations. Furthermore, evidence of heavy discounting on the high street in the post-Christmas period and announcements this week of energy tariff cuts from the likes of British Gas and EDF make the prospect of further sharp falls in inflation likely. Inflation in the US is also forecast to have dropped in December as household energy and petrol prices fell. Overall, the headline annual CPI rate is expected to have fallen to 3.1 per cent from 3.4 per cent in November. "Inflation is expected to trend lower, but with consumer confidence likely rising and housing data set to perform relatively strongly, there appears little case for additional policy stimulus in the near term," says James Knightley at ING. Back in the UK, retailers are forecast to have had a strong end to 2011 as shoppers were attracted by heavy discounting. December retail sales, published on Friday, are forecast to have risen 0.6 per cent month on month to show annual growth of 2.3 per cent. Most analysts are bearish, however, about the prospects for sales in the months ahead. "The pressure from high inflation, fiscal austerity and rising unemployment suggest that the pre-Christmas surge in spending will only make the post-Christmas spending hangover deeper than usual," says Vicky Redwood at Capital Economics. Britain's unemployment rate is expected to remain at 8.3 per cent, according to the International Labour Organisation's data on Wednesday, while average earnings growth is seen remaining at 2 per cent. Industrial surveys in the US are expected to indicate modest growth, with both the Empire State index from the New York Federal Reserve bank on Wednesday and the similar index produced by the Philadelphia Fed on Friday seen ticking higher. Consensus estimates for the national industrial production report for December, however, forecast a drop in output of 0.5 per cent following November's 0.2 per cent fall. China has a big day of data releases on Tuesday, including December retail sales and industrial production, both of which are expected to remain flat. The fourth-quarter gross domestic product estimate will be the most closely watched, however, as the recent trend of slowing growth is forecast to continue. Growth is seen slowing to an annual 8.7 per cent from 9.1 per cent in the previous quarter. "As monetary easing and tax-cut measures gradually filter through, growth momentum should start to improve into the second quarter," says Madhur Jha at HSBC.