Inflation fell markedly (and in some sense mechanically) in the UK last month, but another increase in services price growth made it difficult to put a positive spin on the figures.
Headline CPI rose 6.8% YoY in July, ONS said Wednesday. That was the slowest 12-month rate since February of 2022, but nevertheless counted as an upside surprise, the fifth in six months.
Falling gas and electricity prices were obviously a big factor. The annual rate of food inflation eased to 14.9%, still harrowing, but the slowest pace in 10 months. The peak was 19.2% in March.
And yet, the services gauge rose 7.4%, up from 7.2% in June and on par with the briskest pace in 31 years. Core inflation remained stuck at 6.9%.
A 1.7% MoM increase in rents was the largest in nearly two decades, but it was apparently related to social housing. “The jump seems unlikely to be repeated,” ING’s James Smith remarked, adding that the BoE probably won’t put a lot of weight on the other eye-catching contributor to the hot services print: An outsized increase in airfares tied to summer travel. “This is a highly volatile category, which the BoE typically removes from the index when it looks at ‘core services,'” he said.
Caveats aside, and notwithstanding the drop on the headline gauge, the UK remains an outlier among advanced economies. Progress towards price stability is very slow, and compensation data released earlier this week underscored the lingering risk of the dreaded wage-price spiral.
Annual growth in regular pay excluding bonuses was 7.8% in the three-month period covering April to June, the highest on record in data going back to 2001.
If you squint, you can see real pay growth turning positive for the first time since the three-month period ending October of 2021.
The cruel irony is always the same: Economic orthodoxy argues that past a certain point, people need to make less in order to curb inflation. Although wage growth has now overtaken headline price growth in the UK, pay increases like those illustrated above are conducive to higher economy-wide prices, particularly in labor-intensive services. Put differently, rapidly rising pay will ultimately prove self-defeating as firms pass along higher wage bills to consumers.
The implication for the BoE is that monetary policy may be compelled to induce a recession — you know, for the good of everyday people.
Between the wage update and Wednesday’s services inflation beat, another BoE hike in September seems a foregone conclusion. After that, it’s anyone’s guess, but terminal rate pricing is up near 6%.
With apologies, I’m not sure this is terribly consequential. The amount of time and effort spent obsessing over what happens in the UK often seems out of step with reality and, more to the point, with modernity. This is 2023. It’s been three quarters of a century (at least) since the world revolved around Britain.
Same old story across the pond. Inflation in goods and services is cultivated and ultimately welcomed if in the form of corporate profits, but when it starts showing up in salaries and wages, it’s a giant macro problem that cannot, and will not, be sustained.
Indeed, that’s a bit of a double standard, isn’t it?
100%
Or, you know, the government could try and negotiate with industries and unions to spread the pain across profit margins, real wages and tax bills… but that would require admitting that we are managing capitalism…
I still put the UK’s problem down to Brexit. They purposely narrowed the scope of their markets to enhance their desire for Edwardian independence from the world. The world, it turns out, couldn’t care less. So now they are not a powerful independent nation once again as they wished, but an isolated worn out idea. There is no safety net left (and little collective wisdom either). This country’s story is a lesson in the danger to be found in listening to the trash silly political parties spew. There a couple of those groups closer to home as well, both spewing a constant stream of hazardous waste. No collective wisdom to be found here either.
I live on this island and you’re so right. Were insular by nature and insular in attitude. There is so much ignorance and ennui here these days. I’m shocked what I hear every day.
I recently hiked the Coast to Coast with 11 English and 2 other Americans. Several of the English trekkers told me that Brexit passed due to the weather on the day of the vote. (As the opener to the conversation- this immediately got my attention!)
Rainy and miserable in London (where majority were informed and against Brexit), therefore didn’t get out to vote. Sunny and beautiful in northern England (where majority elderly population lives- who were uninformed and in favor of Brexit) who had a very strong showing at the polls.