Just when you can’t think inflation can’t get any worse it does after UK inflation in February unexpectedly rose to 10.4%, when most had expected the headline number to fall back below 10% for the first time since August last year.
Not only that but core prices also rose sharply from 5.8% to 6.2% dealing a blow to the Bank of England’s claims that CPI had turned the corner and was starting to come down.
Today’s data seals the deal on a 25bps rate rise tomorrow but also increases the pressure for the central bank to go further and consider a 50bps move.
It also calls into question the claims by Tenreyro and Dhingra that the transmission mechanism of previous hikes is already exerting downward pressure on prices. Based on these numbers it clearly isn’t and makes you wonder what it is in the data they are seeing.
More concerning are the areas where inflation is still rising strongly, with food prices up by 18.2%, while we’re also seeing rising prices in restaurants and hotels of 12.1%, in response to rising wages.
Housing and household services also saw a year-on-year increase of 11.8%, and with various utility bill prices due to come into effect in April, along with eye-watering council tax rises there is little prospect of a respite in the short or medium term.
Earlier this year it was claimed that headline CPI could well fall back to 2% by the autumn by some economists. Judging by the strength of this data that claim looks ever more spurious than ever in the absence of a sharp slowdown in the UK economy.
The MPC now has an even trickier problem to navigate than it had a week ago. With the recent turmoil in bond markets, they had the perfect excuse to signal that they were close to peak rates and that the battle against inflation was gradually being won.
That no longer looks to be the case and Bailey and Co don’t have the luxury of being dovish in the aftermath of any rate hike tomorrow.
Headline and core inflation are on the rise again, and while it could merely be a one-off spike before slipping back, the timing couldn’t be worse, with the Bank of England having to explain to the Chancellor of the Exchequer that the battle against inflation might well take a bit longer.
The pound has seen a lift on the back of this data, with today’s Fed meeting also offering a window if the US central bank signals a more dovish message when it meets later today.
While the Fed has the luxury of being a touch more dovish later today the Bank of England does not.
The pound needs to push above the recent range highs of 1.2300 to kick on towards the highs this year above 1.2400.