Bad news: UK inflation ticked up in December.
Headline consumer prices rose 4% last month, ONS said Wednesday. That was warmer than the 3.8% economists expected and marked a slight acceleration from November’s pace.
The headline, 12-month rate of price growth in the UK last rose in February. Put another way, December’s uptick was the first increase in 10 months.
Headline CPI moderated sharply in October as increases in household energy bills fell out of the annual comps, and the downward momentum continued in November, affording Rishi Sunak a “promises made, promises kept” moment vis-à-vis his pledge to cut inflation in half by year-end.
The BoE was at pains last month to disabuse markets of rate cut bets. The bank has been on hold since implementing a 14th consecutive hike in August, and notwithstanding dissents on the MPC, policymakers would rather not have to raise rates again. At the same time, they’d rather markets not press bets on imminent cuts.
On Wednesday, traders trimmed wagers on rate reductions and short-end UK yields surged following the CPI release. Market pricing now reflects four cuts plus some extra premium to account for better-than-even odds of a fifth. When the bank met last month, half a dozen cuts were fully priced.
Services inflation in the UK rose in December. At 6.4%, it’s still woefully elevated. Core price growth was 5.1%, the same rate observed in November.
“It is worth putting this in context by saying that even with this latest surprise, services inflation is still some 0.5 percentage points below the BoE’s recent projections,” ING’s James Smith said. “The lesson here is not to react to one month’s worth of data on services inflation, which has bounced around a bit over recent months, but it is a reminder that the decline in services CPI will be gradual in the near-term, and we don’t expect this to dip below 6% until at least March,” he added.
As with any other inflation report out of an advanced economy in the current macro-policy environment, there are two ways you can interpret the UK release. You can either i) parse the data for the “guilty” categories and then write the whole report off as a minor setback on the path to disinflation or ii) not bother parsing the data in favor of pointing to the headline as evidence that, irrespective of the category breakdown, the job isn’t finished.
Either way, Wednesday’s figures from the UK will reinforce the message from Chris Waller in the US which, in short, was simply that although rate cuts are very likely in 2024, market pricing for imminent and rapid cuts is too aggressive in light of the macro backdrop.
