Inflation moderated in the UK last month.
Not that it matters. It’s small comfort to households, and from a macro perspective, the situation is now so fraught — so impossibly convoluted — that assessing the implications of the incoming data is mostly impossible.
To briefly recapitulate, Liz Truss’s plan to cap energy bills is likely to tamp down inflation in the near-term, reducing the sense of urgency at the Bank of England, which will nevertheless hike for a seventh consecutive meeting next week. However, by forestalling demand destruction, Truss risks embedding inflation in the economy, which means the BoE may find itself compelled to keep rates higher for longer than they otherwise might. Additionally, financing Truss’s plan may be complicated by the BoE’s efforts to shrink its balance sheet.
Given the ambiguity inherent in all of that, and considering 9.9% (August’s headline CPI print) is still nowhere near acceptable, it scarcely matters that inflation ticked below double-digits last month (figure below).
The monthly pace of price growth decelerated to 0.5% from 0.7% in July.
Obviously, falling petrol prices were to thank for the modest easing in price pressures. A drop in the motor fuels gauge made the largest downward contribution to both CPI and CPIH.
On a 12-month basis, CPIH rose 8.6%, down from 8.8% in July, when the annual rate reached the highest on record in data back to 2006. A reconstituted series shows a higher reading in December of 1990.
Note that food and non-alcoholic beverage prices jumped more than 13% on a YoY basis last month, the 13th monthly gain in a row. Last month’s increase was the largest since the eve of Lehman (figure below).
The 1.5% monthly increase in the gauge for food and non-alcoholic beverages counted as the largest since 1995.
The biggest upward contributions to 12-month CPIH came from housing and household services (so, electricity and gas as well as owner occupiers’ housing costs), motor fuels and (one more time) food and non-alcoholic beverages.
Although petrol prices dropped smartly last month, the annual rate of motor fuels inflation was still 32% in August, less onerous than July’s 44%, but still entirely too high.
On the bright side, a spiral to 20% inflation is now off the table. “The introduction of a government cap on household energy prices means that we should now be fairly close to the peak in [the] headline figures,” ING’s James Smith said Wednesday.
“The fact that electricity/gas bills won’t be rising by around 80% in October and a further 30-40% in January means the peak in CPI should be around five percentage points lower,” Smith added. The figure (above) show the bank’s projections.
Bottom line: Inflation in the UK is likely to peak at a lower level than previously feared due to heavy-handed intervention from Truss, but the medium- to longer-term consequences of that are unknowable.
In the meantime, the BoE can’t rest. As is the case in the US, policymakers will fret over underlying inflation and the prospect of a wage-price spiral. As ING went on to say, “The Bank of England is watching wage growth more closely, as the hawks worry that worker shortages could lead to core inflation staying more persistently above target.”