UK Gets Another ‘Terrible,’ ‘Crushing’ Inflation Report

There was more bad economic news out of the UK on Wednesday, when inflation data for April showed price pressures failed to abate as quickly as economists hoped.

Out of three-dozen forecasters who ventured a guess, not a single one put headline CPI at 8.7%, where it ultimately settled last month.

April’s was the first single-digit print since August, but there was little to celebrate. The decline came courtesy of base effects and the rest of the figures were nothing short of alarming. Core price growth was 6.8%, up sharply from 6.2% in March and the highest in three decades.

Note that post-March 1992, the series shows no core prints in the same neighborhood as recent readings. This situation has no modern precedent whatsoever, and on some fronts, it’s getting worse.

The BoE hiked rates for a 12th meeting in May and you can probably pencil in a 13th hike now. At this month’s meeting, the bank again projected a quick decline for inflation back to target (by year-end 2024), but cautioned the drop may be a bit less rapid compared to the previous outlook, delivered in February. “Food price inflation is likely to fall back more slowly than expected,” the MPC said.

Apropos, Wednesday’s data showed food prices rose more than 19% on a YoY basis for the second consecutive month. “We’re now in an unusual situation where food inflation has diverged noticeably from the relevant producer output price measure,” ING’s James Smith remarked. “Assuming the most recent MoM increases in output prices were to continue through the remainder of this year, it implies that food inflation should be back to the 6% area or below by Christmas,” he added.

Smith conceded that in reality, the drop probably won’t be as quick as the modeled outcome suggests, but ING reiterated that “there are nevertheless good reasons to think that food will be contributing less to overall inflation by the end of the year.”

Here’s hoping. And if past is precedent, the end of the year is likely to be seven months away. That’s a long time to wait just to get food inflation back to levels that’d still count as the highest in 15 years.

Vexingly for Andrew Bailey and co., services inflation isn’t just unbowed, it’s trekking higher. Not that anyone should’ve expected otherwise, but the all services gauge rose almost 7% YoY in April, the most rapid acceleration since 1992.

Anecdotes from the flash readings on S&P Global’s UK PMIs for May underscored the persistence of price pressures on the services side. Chris Williamson, S&P Global’s chief business economist, described “renewed inflationary pressures, as service providers struggle to meet demand and hence not only offer higher wages to attract staff but also find themselves able to charge more for their services.”

I have no idea whether, or to what extent, that assessment can be directly compared to Wednesday’s data release (i.e., whether the types of businesses polled by S&P Global and CIPS match up with the source of the services inflation impulse as reflected in the ONS inflation figures for April), but that doesn’t change the overarching message. Williamson summed that message up succinctly on Tuesday. “It’s the service sector that will typically dictate policy, meaning these survey results are nothing but hawkish in suggesting the Bank of England has more work to do to quash stubbornly high inflationary pressures in the services economy,” he wrote.

That was certainly the market’s assessment of the April CPI and CPIH numbers. Terminal pricing ratcheted up to almost 5.5%. That seems far-fetched if for no other reason than the hikes aren’t working, but whatever the case, and notwithstanding the possibility for the balance of data between now and the next meeting to offer some hope, a hike in June feels eminently more likely than not.

Most of the analyst commentary was bleak. Words like “terrible” and “crushing” were bandied about. Jeremy Hunt tried to put a positive spin on things, but… well, lipstick on a pig. “The IMF said yesterday we’ve acted decisively to tackle inflation but although it is positive that it is now in single-digits, food prices are still rising too fast,” he said Wednesday. “We must stick resolutely to the plan to get inflation down.”

Hunt was set to meet with food manufacturers this week in an effort to, as he put it, “understand what’s driving” high prices. “I’m asking industry to work with us,” he mused.