Believe it or not, the UK delivered some incrementally good news on inflation Wednesday.
Consumer prices rose “just” 7.9% last month, down sharply from the prior month’s annual pace and the largest downside miss to consensus in two years. It was the first time since January that headline CPI in the UK undershot forecasts.
The UK is staring down what it’s entirely fair to call a full-blown, multi-faceted economic crisis. Inflation is the crux of the problem. June’s headline CPI print was the coolest since March of last year.
CPI ran in the double-digits for seventh consecutive months from September to March. October’s 11.1% 12-month pace was the highest annual inflation rate in 42 years.
Both core and services inflation ticked lower in June, a welcome reprieve after May’s disconcerting figures. “As always, we caution that one month doesn’t make a trend, but our expectation is that services inflation should gradually nudge lower through the remainder of this year,” ING’s James Smith said.
Although wage growth remains too high to be consistent with price stability, Smith went on to note that recent surveys suggest price increases in the services sector “can be traced in large part back to higher energy prices.” “Now that gas prices are dramatically lower, the impetus for firms to continue to raise prices quite as aggressively should fade,” he added. An ONS poll shows the share hospitality firms expecting to raise prices in the near future is down 20 points from 46% to 26% since April.
Food and non-alcoholic beverage price growth was 17.3% in June, down a full percentage point from May’s pace. Food inflation approached 20% earlier this year.
Transport prices fell by 1.7% in the year to June thanks to motor fuels. You can see the negative contribution to the overall CPI print in the figure above (the teal bars). It was the first negative reading in nearly three years.
The Sunak government, which has promised to halve inflation by the end of the year, was pondering steps to cushion the blow from higher rates to homeowners, at least a million of whom will need to refinance soon. Two-year swap yields, which are linked to mortgages, plummeted Wednesday, and are now some 75bps off the highs.
BoE terminal rate pricing slipped below 6% and the market-implied odds of another 50bps move from the bank at next month’s meeting fell.
It’d be a mistake, I think, to declare this report a turning point or to make any definitive statements about “watershed moments,” as one economist bravely ventured on Wednesday. The UK is nowhere near out of these particular woods, although I suppose it’s possible the worst is over.
“We aren’t complacent,” Jeremy Hunt promised, adding that the government “know[s] high prices are still a huge worry for families and businesses.”
