Earlier this week, “stronger-than-expected wage growth bolster[ed] BoE caution.” That’s an actual headline from a mainstream financial media outlet. Fast forward 24 hours and “weaker-than-expected inflation provide[d] relief for [the] BoE.” That’s another actual headline, and it was situated right next to the first one on Wednesday.
The juxtaposition was amusing and speaks to the 24-hour news cycle and the ebb and flow of a policy narrative which moves much faster in the media and among STIR traders than it does in actual policy circles.
I don’t know that I’d call Wednesday’s top-tier data out the UK “good” or “encouraging,” necessarily. But it wasn’t overtly alarming like Tuesday’s US CPI report. Headline price growth in the UK last month was 4% YoY, a touch lower than forecasts.
Services inflation, which policymakers are eyeing closely for evidence that inflation is an in-house phenomenon, if you will, was likewise a marginal downside surprise, even as it ran 6.5%, so far above the BoE’s overall price stability target that the two are scarcely worth mentioning in the same breath. The core measure stuck at 5.1% for a third consecutive month.
The narrative on Wednesday went something like this. Tuesday’s wage growth figures out of the UK were warm (ex-bonuses, pay rose 6.2% from a year ago versus 6% expected) and the US CPI report was too, which (somewhat unscientifically) pointed to an upside surprise from Wednesday’s UK CPI report. It made sense from a kind of “when it rains it pours” perspective. And it’s certainly the case that robust wage growth can go hand in hand with uncomfortably rapid consumer price growth. But it’s not obvious there was any actual, mathematical read-through from this week’s early releases for Wednesday’s CPI update from ONS.
Anyway, “phew.” Dodged a bullet. UK price growth was “steady.” That’s the story. And markets ran with it to price in a bit more BoE rate-cut premium, reversing Tuesday’s trimming of the same bets. The bank will deliver a pair of 25bps cuts and almost surely a third this year, traders reckon.
The keen among you will recall that the last BoE meeting was something of a watershed in that one of the dissents wanted a cut at this year’s first policy gathering. The bank also softened its forward guidance, even as the new projections, conditioned on market pricing for the rates trajectory, suggested inflation would remain above target through 2026 after briefly receding to 2% next quarter. So, if (when) you see UK inflation fall near the bank’s objective sometime in the spring, just know that’s expected and also know that’s not expected to be the end of it, particularly if the bank acquiesces to market calls for cuts.
The figure below gives you a sense of the progress towards “normal” across the world’s most important advanced economies.
So close. And yet so far away.
Obviously, the combination of falling headline CPI in the UK and robust wage gains is good news on Downing Street, where Rishi Sunak will surely suggest that citizens like Dean are actually getting ahead. And in a hurry, what with pay growth running above 6% and inflation “just” 4%. It won’t matter electorally. Truss ruined it for Conservatives. Maybe forever.
Jeremy Hunt was on message. “Inflation never falls in a perfect straight line, but the plan is working,” he said, touting “huge progress” on the inflation front. After all, he reminded UK voters on Wednesday, CPI was 11% at one point not so long ago.
