Wholly predictable outcomes are scarcely worth mentioning. But when it comes to pervasive inflation in advanced economies, every print demands attention.
In our quest to document the developed world’s bout with what, to citizens in rich nations, feels like acute price pressures, we shouldn’t lose track of the fact that someone, somewhere, always has it worse. “Aging and Abandoned in Venezuela’s Failing State,” as published Tuesday in the The New Yorker, is a poignant reminder.
That said, soaring inflation in the developed world is notable not just because of the implied human suffering among lower- and middle-income households, but also because every incremental piece of evidence to support the contention that inflation is becoming entrenched argues for a more aggressive monetary policy response. And monetary policy in the advanced world has knock-on effects for the developing world and, ultimately, for frontier economies and even failed states.
It’s with all of that in mind that I present the latest read on UK inflation, which printed a three-decade high 7% for March, in data out Wednesday (figure below). The MoM print was a disastrous 1.1%. The YoY core reading was 6.2%.
25% of the UK’s inflation basket is experiencing double-digit increases. That figure rises to 50% if you lower the threshold to increases of at least 5%.
Rishi Sunak delivered the usual boilerplate attempt at empathy. “I know this is a worrying time for many families which is why we are taking action to ease the burdens,” he said Wednesday.
The problem is, Sunak’s “actions” are seen in many corners as wholly insufficient to address the problem. I talked at length about this late last month when the UK announced a mini-budget aimed at tackling the “cost of living crisis,” as nearly everyone now dubs the situation. The pushback was telling. Sunak’s plan seemed opportunistic — designed to restore whatever’s left of his credibility as a proponent of lower taxes, as opposed to someone who’s concerned about the plight of the poor.
Missing from the plan was an increase in welfare payments commensurate with the surge in inflation. In its March economic and fiscal outlook, the Office for Budget Responsibility said real household disposable income per person will drop by 2.2% in 2022-23, the biggest decline in any single financial year since ONS records began in 1956-57 (figure below).
“The largest upward contributions to the annual CPIH inflation rate in March came from housing and household services, principally from electricity, gas and other fuels, and owner occupiers’ housing costs,” ONS said Wednesday, before noting that contributors to the monthly change “came from many categories… with no large offsetting downward contributions.”
And it gets worse. Producer prices rose nearly 12% in March, the hottest pace since September of 2008 (figure below). Input prices jumped nearly 20%, the most ever, in data back to 1997.
Clearly, the BoE is under immense pressure, but what you’ll note from the above is that the culprits aren’t readily addressable by monetary policy. The BoE can’t hike electricity prices into submission, for example.
At its March meeting, the bank said inflation will likely increase further in the second quarter, to around 8%. The MPC hiked rates for a third consecutive meeting, bringing Bank Rate to pre-pandemic levels. They’ll likely keep up the pressure, but the risk is that rate hikes end up being insult to injury for consumers, for whom things are getting worse in real time, even if April marks a “darkest before the dawn” moment on the price front.
“It still looks like April will mark the peak, and today’s upside surprise means we should probably expect that to be around 8.5% or perhaps even slightly higher,” ING said Wednesday, flagging the 54% rise in the household energy cap.
It’s the same story for the UK as it is for the US. Inflation may be on the verge of peaking. But any relief for consumers risks being offset by the impact of tighter monetary policy aimed at addressing an inflation surge that’s already happened.
The end result will likely be a simultaneous growth shock across the developed world sometime later this year or early next.
