“Bloody hell! It’s about time.”
Or something. However you’d express exasperated gratitude for good news if you were a UK policymaker accustomed to the opposite, that’s what Bank of England officials were muttering to themselves on Wednesday.
On the eve of another difficult BoE decision, an update on UK inflation showed price pressures abated in August, albeit begrudgingly. Headline CPI printed 6.7%, down a tick from July’s YoY pace and below estimates.
More notably, core and services inflation receded to the slowest rates in six months. “Slow” is a relative term here. Services inflation is still running 6.8% and core remains triple the BoE’s target (and then some).
The UK has suffered disproportionately among advanced economies in the post-pandemic, war-torn macro environment. Inflation is very stubborn, growth prospects grim and the domestic political landscape fraught.
A year later, the nation is still reeling from Liz Truss’s disastrous, 45-day stint as Prime Minister. Her dubious legacy is an albatross for Rishi Sunak and the Tories, and to call Truss unrepentant would be an understatement.
Sunak’s premiership probably won’t be remembered fondly either way, but it’d certainly help if he could claim mission accomplished vis-à-vis his promise to halve inflation by the end of the year. (Dean would surely appreciate it.)
The BoE, meanwhile, is in a hopeless bind. Additional rate increases risk condemning an already doomed economy to something worse than stagflation, but policymakers are working with a single mandate — so, what are you gonna do?
Wednesday’s relatively favorable inflation figures may allow the bank to skip hiking this week. As a reminder, last month’s increase was another fractious affair. The vote was 6-3, underscoring a lack of consensus amid acute macro ambiguity.
Obviously, additional hikes can’t be ruled out. Indeed, markets were pretty sure Thursday was a “go” (so to speak) until the CPI figures came in cool. Goldman said the 14th hike (last month) was probably the last of the cycle.
I’m not sure there’s much utility in parsing the CPI release to death or otherwise pontificating on the unknowable. The bottom line is that the UK economy is staring at a protracted period of lackluster growth if it manages to grow at all, and it says a lot about the intractability of the inflation situation when 6.7% CPI against a 2% target is considered good news.
Recent increases in energy costs don’t bode well going forward, and for anyone inclined to cite forecasts and projections, I’d point you to the figure above. Then I’d laugh.
Speaking of punchlines, Jeremy Hunt had one. “The plan to deal with inflation is working, plain and simple,” he said Wednesday. “But it’s still too high.”
Bloody hell.
