2023-04-22 08:00:00 ET
Summary
- U.K. consumer price inflation printed at 10.1% year-over-year.
- Within the services sector, there have been strong gains in catering, accommodation, and package holiday prices, while core goods like furniture, cars, and health insurance had large increases as well.
- Risks are still skewed toward upside inflation surprises; moreover, the resilience of services inflation and wage growth expectations makes it difficult for the MPC to maintain a dovish narrative.
By Kostas Deslis
Britain's double-digit inflation for the ninth consecutive month puts pressure on the Bank of England and U.K. households.
U.K. consumer price inflation printed at 10.1% year-over-year (YoY), with core inflation remaining sticky at 6.2%. Services inflation matched February's number at 6.6% YoY with core services at 6.7%. We view this as important given that the Bank of England had signaled that services inflation will be an important part of its inflation assessment.
Where is this inflation coming from? The short answer is: everywhere except for energy inflation, which is moving lower quickly but remains at very elevated levels, most recently 40.5% YoY. Within the services sector, there have been strong gains in catering, accommodation, and package holiday prices, while core goods like furniture, cars, and health insurance had large increases as well. Another problem is that food inflation marked stronger gains than anticipated. The cost of living, combined with the higher base rates, makes the affordability of U.K. housing the worst we've seen since the 1970s.
Nevertheless, the labor market remains very strong with wage growth reversing course and rising 6.6% (three months, YoY). This increase was driven by private sector pay gains that are now running at 7.3% YoY and with a potential to rise even further given bonus payments made in March. With the redundancy rate dropping to 3.2% (per 1000 employees) and the ratio of vacancies to unemployment unchanged at 1.2, there are no signs of a cooling labor market in BoE's estimate of the Non-Accelerating Inflation Rate of Unemployment, or NAIRU.
So, where does the BoE stand, given the above? The market is already pointing to a 4.94% terminal rate in September, leaving three more hikes in the current cycle. Given the volatility of inflation data and its subcomponents, we expect the BoE's Monetary Policy Committee ((MPC)) to remain cautious and underline the importance of data dependence in forward guidance. Risks are still skewed toward upside inflation surprises; moreover, the resilience of services inflation and wage growth expectations makes it difficult for the MPC to maintain a dovish narrative.
The biggest question, however, is how many more rate hikes the U.K. economy can sustain in light of data suggesting that only 10% of mortgage owners have refinanced since the beginning of the last hiking cycle. Given that the U.K. is also in a persistent current-account-deficit regime, this poses another question: Where do outside investors see the fair value of rates and FX for a sustainable and growing economy? All told, we'd argue that the BoE is facing the most challenging situation of any major central bank.
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U.K. Inflation Continues To Surprise