UK Inflation Still Running Double-Digits, But Silver Linings Seen

The good news is, UK inflation ran at the slowest pace in four months in January, according to data released Wednesday.

The bad news is, “slow” is a misnomer. At 10.1%, CPI remained in the double-digits last month, ONS said.

The headline print was better than the 10.3% economists expected, but that’s meaningless to everyday people struggling to cope with the worst cost of living crisis in modern history.

It was the third consecutive monthly decline, but CPI is still so far above the BoE’s target that the comparison is scarcely worth mentioning. On a MoM basis, CPI dropped 0.6% in January.

As a reminder, October’s headline print, 11.1%, was the highest in more than four decades. I suppose policymakers can take comfort in the notion that from a historical perspective, inflation is actually quite low in the UK.

That’s a friendly reminder that these times of ours are anomalous. Maybe the relative stability seen during the 90s and 2000s represented progress, or maybe it was just an interlude and we’re now reverting to our default setting, which is something akin to chaos.

A 4% decline in petrol prices contributed to the cooler reading in January. A gauge of annual motor fuels inflation was running at nearly 44% last summer. It was down to 7.7% last month, helping drive a seventh straight drop in the broader transport category.

The numbers came on the heels of compensation data which showed UK earnings excluding bonuses rose at a brisk 6.7% pace during the final three months of 2022 compared to the same period in 2021, stoking concerns of a wage-price spiral and adding to speculation that the BoE probably isn’t done raising rates.

At this month’s policy gathering, officials opened the door to a pause after a 10th straight hike.

The bank’s latest forecasts see CPI dropping more than six full points to around 4% by year-end.

Critically, services inflation ebbed. I won’t trouble you (or me) with discerning the “best” measure of services price growth in the UK. The figure below is the CPIH gauge. Suffice to say services sector price growth fell back in January, and that was a pleasant surprise.

ONS noted falling prices for passenger transport services, and a “downward contribution” from other recreation and personal services, “particularly restaurants and cafes.”

Another gauge of UK services price growth fell to 6% from 6.8%, and ING noted that core services, which the BoE is focused on as it captures categories deemed to be “less volatile and show more persistent trends,” likewise fell.

“One month does not make a trend. By definition, the Bank of England’s focus on ‘persistence’ suggests policymakers are going to be less fazed by month-to-month gyrations in this data,” ING’s James Smith said, adding that nevertheless, their view is that services inflation “has probably peaked.”

The question is whether Bank Rate has “peaked,” and the answer from traders is “probably not,” particularly given persistently elevated pay growth or, if you prefer the accidentally insulting description often employed by economists, workers “bidding up” wages.

Although rate hike bets were trimmed Wednesday, money markets still price at least two more 25bps moves from the BoE.

“The MPC has made it clear that services inflation and wage growth are front and center in shaping their upcoming policy decisions,” TD analysts including Lucas Krishan and James Rossiter remarked. “We believe that today’s inflation data and yesterday’s labor market report provide enough evidence that the MPC needs to tighten policy once again by 25bps in March, but the underlying details suggest this may be all that is required.”

Public sector wages are rising at the briskest pace in some 17 years in the UK, but the growth rate still trails that for the private sector by three full percentage points. The incidence of strikes late last year was the most intense since December of 1989.