Services turnover figures for July and August suggest that GDP rose by about 1% in the third quarter – a preliminary official estimate will be released on 25 October.

Annual growth in turnover value was 11.0% in July / August combined, up from 10.0% in the second quarter. This suggests that the quarterly increase in services output volume last quarter at least matched that a year earlier, in the third quarter of 2012. The latter rise was 1.0%, partly reflecting the Olympics boost.

A 1.0% rise in services output would contribute 0.8 percentage points (pp) to quarterly GDP growth. Output data for industry and construction for July / August are consistent with the two sectors adding about 0.2 pp, for a GDP gain of 1.0%.

Such growth would be above the consensus estimate of 0.8% but would be consistent with the strength of recent business surveys and labour market data. It is, of course, possible that the Office for National Statistics will issue a lower preliminary number that is subsequently revised up.

The MSCI World equity index closed yesterday at a new post-crisis high and is only 5.7% below the all-time peak reached in October 2007*. Recent solid performance is consistent with two investment rules followed here.

The first rule, discussed in numerous posts in recent years, switches between global equities and US dollar cash depending on whether the annual growth rate of the G7 real narrow money supply is above or below that of industrial output. The motivation is that “excess” money growth is usually associated with asset price inflation. This rule outperformed buying-and-holding equities by 3.6% per annum between 1969 and 2012. G7 real money growth is currently still above output expansion but the two series are converging, raising the possibility of another “turn defensive” signal within the next 12 months – see first chart.

The second rule, discussed in a post in May, switches between equities and cash depending on whether the G7 longer leading indicator followed here is above or below its long-run average. The indicator is derived from the OECD’s country leading indices and is designed to predict turning points in six-month industrial output growth. A cross of the indicator below the long-run average suggests sub-trend economic growth (or worse) – equities underperform cash on average during such episodes. This rule outperformed buying-and-holding equities by 5.3% per annum between 1969 and 2012. The second chart compares the cumulative return with that of the excess money investment rule.

These returns are hypothetical because they are based on currently-available data. This is less of a problem for the excess money rule – annual real money and industrial output growth could have been calculated in real time and subsequent data revisions would probably have made little difference to the timing of cross-over signals. By contrast, the leading indicator series incorporates changes over the years in the construction and constituents of the OECD’s country leading indices. Data revisions to these indices, moreover, are sometimes significant. The historical return of the leading indicator rule, therefore, is unlikely to have been achievable in practice.

The G7 longer leading indicator was above its long-run average in August but has fallen since May – third chart.

Both investment rules, therefore, currently still favour equities over cash but, if recent trends are sustained, may issue warning signals over the next 12 months. The rules, it should be noted, are designed to capture the bulk of gains during market upswings while limiting losses during downswings – they rarely mark the exact top of a bull run or bottom of a bear market.

*US dollar index. The return index including reinvested dividends is 11.4% above the October 2007 peak.

UK consumer price inflation was unchanged at 2.7% in September, while the “core” rate monitored here – which excludes energy, unprocessed food and undergraduate tuition fees – edged up from 2.0% to 2.1%. Headline inflation is forecast to moderate near term, averaging about 2.5% over the next six months, before rebounding to more than 3% later in 2014 in lagged response to faster monetary expansion in 2012-13 and associated economic strength – see first chart.

The expected near-term decline, despite another hike in household energy tariffs, reflects lower petrol costs, a likely slowdown in food inflation and an assumed dampening impact on other import prices from recent sterling appreciation. The rise in energy tariffs will be similar to last year so will have limited impact on headline inflation. An easing of food pressures, meanwhile, is suggested by recent declines in output price and input cost inflation in food manufacturing.

The forecast that inflation will trend higher during 2014 and early 2015 reflects the two-year leading relationship between monetary expansion and core price pressures – see previous post for more details. It incorporates a judgement that there is limited effective economic slack, so that solid growth will generate capacity strains and lift corporate pricing power. This is supported by the third-quarter British Chambers of Commerce survey released last week, showing that the proportions of firms in services and manufacturing working at full capacity are normal and high respectively – second chart.

Former MPC member David Blanchflower has accused the author of this journal of “crying wolf again” by forecasting that inflation will rise in 2014-15. The consistent view here in recent years has been that the stance of monetary policy was incompatible with returning inflation to the 2% target; this judgement has proved correct. The last forecast of a major inflation upswing was made in autumn 2010, ahead of a surge in the headline CPI rate to a peak of 5.2% in September 2011*.

*The forecast was that inflation would average 3.9% in 2011, which compared with Bank of England and consensus projections at the time of 2.8% and 2.6% respectively. The outturn was 4.5%.

Chinese September money numbers cast doubt on hopes that the economy is regaining momentum.

Six-month growth rates of real M1 and M2 fell last month and have declined significantly since spring 2013, towards levels reached during the 2011-12 “hard landing” scare – see chart. This suggests that economic expansion will slow in late 2013 / early 2014 unless exports pick up on the back of stronger global activity.

Six-month real money growth, moreover, is below that of industrial output, based on an August number for the latter*. There appears, in other words, to be no “excess” liquidity available to boost asset prices.

The fall in real money expansion in September partly reflected a food-driven rise in inflation – likely to reinforce an official bias against further monetary policy easing at present.

*A September figure is due this week.