UK CPI Inflation Preview (Mar 20): Headline and Core to Fall More Clearly?
UK headline and core inflation have been on a clear downward trajectory in the last few months the former having peaked above 10% in February and the latter at 7.1% In May. However, this trend surprisingly stalled in December as the headline rate rose a notch to 4.0%, up from a 27-month low of 3.9%, the first rise in 10 months and where the core rate remained at 5.1%, still a 23-month low. They both stayed there in January too. However, we the downtrend resuming in the February CPI numbers and clearly so (Figure 1), despite higher petrol prices, with food acting as a major offset. We see the headline rate down to 3.4%, a 29-month low and the core down to 4.7% a 23-month low, but there may be some rise in apparent core momentum as measured by adjusted m/m numbers (Figure 2).
Figure 1: Headline and Core Inflation Drop to Resume?
Source: ONS, Continuum Economics
The stable January CPI data came alongside clearly soft PPI data at least for manufacturing, this helping explain the disinflation very evident in core goods prices. As for the CPI numbers, the headline stayed at 4.0% y/y in January. The largest upward contribution to the monthly change came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages, the latter saw the first m/m fall in since September 2021, and the largest fall since July 2021. Core CPI (excluding energy, food, alcohol and tobacco) rose by 5.1% in the 12 months to January 2024, the same rate as in December 2023; the CPI goods annual rate slowed from 1.9% to 1.8%, while the CPI services annual rate increased from 6.4% to 6.5% due to base effects.
The headline rate was still some 0.1 ppt below formal BoE thinking and is clearly a reassurance not least as all but three of the 12 main components saw a fresh drop and where our estimate of the seasonally adjusted data saw something of a return to the clear disinflation trend seen in months prior to December. Indeed, on this basis, CPI core inflation was within the 2% target as it was on a 3 mth/3 mth annualized basis, a measure that the B0E is starting to use more formally – there may be some rise in core momentum as measured by the adjusted m/m numbers in the February data however (Figure 2)!
Figure 2: Adjusted Core CPI Pressures Have Been Falling Broadly Even on BoE Measure?
Source: ONS, Continuum Economics, smoothed is 3 mth mov avg
The CPI data have been perturbing for the BoE hawks and hence their MPC demand to see more data to assess how sizeable and durable the current disinflation process actually is. Notably, favourable base effects and the drop in the energy cap should bring headline inflation down to even a touch below the 2% target by April, an outlook that the even the BoE acknowledges, albeit with the latter thinking this will be more on a short-lived basis than we think likely!