UK’s Economic Nightmare Rolls On

The UK’s inflation problem isn’t getting better.

“These figures reaffirm exactly why we must continue with our efforts to drive down inflation so we can ease pressure on families and businesses,” Jeremy Hunt said Wednesday.

“These figures” was a reference to disconcerting March CPI data. Inflation remained in the double-digits, frustrating economists who expected a decline below 10%. What little relief there was came courtesy of motor fuel prices and heating oil, as the UK begins to lap the war comps.

Headline CPI has run above 10% for eight of the last nine months in the UK.

Economists were looking for 9.8% from March’s 12-month print. It was the second straight bitter disappointment. Forecasters likewise expected a single-digit print from February’s report, released a month ago, only to be let down (or up, depending on how you want to look at it).

The data comes as the government struggles to resolve public sector pay disputes. According to ONS, nearly 350,000 work days were lost to labor actions in February, up sharply from January.

That brought the total to more than three million since the statistics office began gathering the data again last year following the suspension of collection during the pandemic.

The labor stalemates precipitate a self-feeding doom loop. “Anything that exacerbates the UK’s labor shortages adds to the country’s gloomy economic picture, which compounds the pressure on wages, which adds to the upward pressure on government spending, which contributes to increased taxes, which worsens the government’s general malaise, etc.” the FT wrote this week.

Updated figures on pay growth, released Tuesday, showed real total pay for the December to February period fell 3%, among the biggest declines in the 22-year history of the data set.

In nominal terms, regular pay rose 6.6%, far too brisk for the BoE’s liking.

The juxtaposition between depressed inflation-adjusted pay and hot nominal compensation underscores the intractability of the wage-price nexus. High nominal pay can feed inflation, which erodes real pay, and negative real pay prompts demands for even higher nominal pay, which drives up inflation as employers attempt to protect margins. And around we go.

The gap between public and private sector pay (which had ballooned, prompting demands for higher wages for public workers), is narrowing. But apparently not enough to satisfy many laborers.

Average regular pay growth was nearly 7% for the private sector from December to February. That was 1.7pp higher than public sector pay growth. That’s a lot when inflation is running as high as it (still) is.

Grocery prices, which rose at a truly harrowing rate in February, accelerated even more sharply in March. The YoY pace of food and non-alcoholic drink price inflation exceeded 19% last month, Wednesday’s CPI data showed, the highest in 45 years. On a MoM basis, food bills rose 1.1%.

ONS offered some helpful color. “The largest upward effect came from bread and cereals,” the office said. The annual rate there was 19.4%, the highest ever.

Apparently, the most acute “push” came from “a variety of biscuits and cakes,” but “upward effects” were also observed in fruit, chocolate and meat. That’s very distressing news for anyone whose breakfast consists of meat, biscuits and chocolate sauce. It’s also bad news for a BoE that would like to have the option to pause rate hikes at some point. After Wednesday’s data, a 12th consecutive increase in May is the base case.

“The headline story from Wednesday’s UK inflation numbers is that core CPI stayed at 6.2%, having been expected to slip back towards 6%,” ING said. “On paper, that core inflation number looks pretty grim for the Bank of England ahead of its May meeting, but we need to remember that [they] have been making a clear distinction between services and goods inflation over recent months,” the bank’s James Smith added, noting that “when we cut out some temporary volatility earlier this year, the net effect of the past few months is that services inflation has stabilized.”

Here’s hoping, and I won’t dispute that assessment. But I will say that additional commentary around Wednesday’s figures was fatalistic, and as Smith also noted, “core goods inflation… is proving much stickier than expected.” David Bharier, head of research at the British Chamber of Commerce, lamented that, “Prices continue to rise at an alarming rate.”

Needless to say, none of this is good news for Rishi Sunak, who promised to cut inflation in half by year-end. If he’s looking for outside-the-box ideas, he could go back to the soup kitchen and find Dean. After all, he’s interested in business, needs a job and is acutely aware of how onerous the economic environment in the UK really is.