UK inflation persists

The noise

• UK CPI rose 10.1% in March from a year ago, despite economists expecting a slowdown to 9.8% following the strongest increase in food prices in more than four decades. This reading suggests a pause on further rate hikes will be unlikely, as money-market traders price consecutive 25-basis-point increases in May and June. It also suggests that prices in the UK have more momentum than in the US and Eurozone, indicating a slower path back to the Bank of England’s 2% inflation target.

• Resurgent service-sector activity has fuelled momentum for the Euro area’s economic rebound. Growth accelerated to an 11-month high, a product of improved demand that resulted in a significant increase in employment per a S&P Global business survey. The manufacturing sector on the other hand has weakened further, although output would have been dragged lower by protests in France. Overall, businesses were positive on their outlook, a product of easing energy concerns, improving supply chains and the hope that inflation has passed its peak.

• The turmoil in the US and European banking sectors, against a backdrop of successive Fed rate hikes, resulted in a mixed first quarter of 2023 for US banks. Whilst regional banks are still suffering from the fallout of the failure of Silicon Valley Bank and Signature Bank, larger banks benefitted from higher interest earnings.

​The numbers

The nuance

Perhaps the most compelling aspect of this week’s inflation figures is how sticky it is. In the UK, inflation hasn’t budged since the start of the year, while in France it has fallen from 7.7% to 6.6%, in the US from 6% to 5%, and in the Eurozone from 8.5% to 6.9%. Despite its stubborn start to the year, UK inflation will fall by year end and this will become evident in next month’s report. This will be a result of what’s called base effects, which refers to the base period used to measure inflation. As inflation in April 2022 was much higher than it was in March 2022, the base figure used to calculate inflation next month will be higher. This will lead to a smaller increase should inflation not rise by more than it did in the same period last year. The jump in CPI from March 22 to April 22 was the highest monthly increase (2.5%) since January 1998. With only four instances of CPI rising by more than 1% in a month during that period, it’s relatively safe to assume inflation will fall next month.

The inflation report, coupled with wage growth data coming in above economist estimates on Tuesday has piled pressure onto the Bank of England to raise rates. Currently at 4.25%, markets are pricing in rates reaching 5% by the end of the year, and it is hard to see how the tightening cycle can be stopped in the short term.

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