Just when you think it can’t get any worse, and we thought that UK inflation was on a downward track UK core CPI goes and jumps to a new 30 year of 7.1%, while headline inflation remained steady at 8.7%.
Today’s numbers are a further headache for the beleaguered Bank of England monetary policy committee and yet another stick to beat them with.
For a central bank whose inflation target is 2% and who for so long were insistent that inflation was transitory there is a real risk that anything the central bank does tomorrow will be ignored by financial markets.
There is no doubt these numbers are bad news for households as well as the mortgage market, which is already showing signs of strain.
Today’s ONS numbers did point to a rather large jump recreation and culture and specifically fees to live music events.
Last week Sweden blamed the “Beyonce” effect for a surprise rise in their own headline inflation rates, and the same thing appears to have happened here in the UK with tickets going on sale for live performances to see Taylor Swift and Beyonce, during the month of May.
Restaurants and hotels also saw a lift during May, and this could have been down to the Coronation and the two bank holidays which provided a lift to that sector.
Food price inflation slowed to 18.3%, however we already know from the latest Kantar survey that in June this slowed to 16.5%, however the process remains glacial, but should continue to slow.
The biggest concern is the continued increase in core prices with services inflation remaining sticky, rising to 6.3% from 6% in April.
A lot of this increase in services price inflation will be down to the paying of higher wages to staff, but we can also blame the energy price cap, which has meant that consumers haven’t seen sharp falls in the cost of their energy costs straightaway, forcing them to push for higher wages.
This is probably why UK inflation is stickier than its continental peers.
Natural gas prices are already back at levels 2 years ago, yet consumers haven’t seen that in their energy bills yet, even as fuel pump prices have. The energy price cap will see a fall in July, and some energy providers are cutting the direct debt payments of their customers already, but it’s all so slow.
Amidst all this gloom there is room for optimism if you look at the trends in PPI which tends to be an indicator of where we are heading.
In May input and output prices came in negative month on month to the tune of -1.5% and -0.5%, while China and Germany are also showing increased signs of deflation, which should bring inflation down in the second half of this year.
These have been weak all year, however markets aren’t looking at these yet, and perhaps they should be because its likely we’ll see inflation come in much lower.
UK gilt yields have jumped sharply on the back of these numbers, with 2-year yields back above 5% and their highest levels since 2008.
Today’s numbers have also increased the prospect that we might get a 50bps rate hike, instead of 25bps from the Bank of England tomorrow, pushing bank rate to 5%, to try and get out in front of the narrative, and convince the markets of their determination to hit their 2% target.
Sadly, for the Bank of England that ship has sailed, as very few believe anything they have to say anymore, with financial markets pricing in the prospect of a 6% base rate by the end of this year.
As for tomorrow’s Bank of England rate decision we could well see the bank raise rates by 50bps instead of the 25bps which is expected.
If we do get 50bps it’s quite possible, we may not need a rate hike in August, if the inflation data does start to show signs of easing.
In conclusion while today’s numbers are worrying it's also important not to implement a knee jerk response, when we know part of the reason inflation is sticky is due to the energy price cap. This will come down in July and in all honesty should be consigned to the dustbin, as its not reactive enough when prices fall.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.