UK CPI Review: Inflation Peaking?
What have been energy induced price rises are starting to ease and may do so further In June before the OFGEM induced price rise hits July numbers. But a less worrying picture emerges in the latest (ie May) CPI and even PPI data. Indeed, once again, actual CPI have offered a more benign picture both in terms of headline and underlying trends. In fact, the headline was down to a lower-than-expected 2.8% (BoE saw 3.0%) despite a 15% m/m rise in fuel related energy in April, this offset by services dropping almost a full ppt, taking the core down to 2.5%, a four-year low. But coming in much lower than expected, the headline stayed at this 13-mth low of 2.8% in May, with the core edging up only a notch partly on the back of quirky seasonal rise in airfares affecting services (back up to 3.7%). The data suggest that the headline may be near a peak and these numbers (together with the labour market numbers due Thursday) suggest headline CPI may be near a peak, albeit one that may be around 3% more toward end year!
Figure 1: Headline and Core Hardly Bounce Back?
Source: ONS, Continuum Economics, % chg y/y
It is noteworthy that without the rise in fuel prices in the last few months, headline UK inflation would actually be on target, ie in line with most projections, (inc the BoE) ahead of the breakout of the Middle East conflict. Even so, the April and May reality of a headline at 2.8% is well below BoE thinking (ie 3.3% for May) and surely further reduces the chance of near-term MPC hikes, not least the lack of second-round effects. As for the policy outlook, the IMF now says in its Concluding Statement of its latest insight into the UK, monetary policy should remain restrictive to ensure that higher energy prices do not spill over to core inflation and wage growth. It says that the rise in energy prices will lift headline inflation this year while also weighing on output, complicating policy calibration. Staff assesses that holding the policy rate unchanged for the remainder of the year would maintain a sufficiently restrictive monetary stance to limit second-round effects and keep long-term inflation expectations anchored. However, given exceptional uncertainty, the BoE should retain the flexibility to adjust the monetary stance in either direction (ie hikes or cuts), but be prepared to respond forcefully if second-round effects prove stronger than anticipated. More recently, the OECD went further, pointing a to renewed rate cuts late this year, noting that ‘further easing in monetary policy is expected, with the Bank of England looking through the energy shock in 2026 and moving to a neutral stance in 2027’
Figure 2: Clear Adjusted Core Inflation Drop Continues?
Source: ONS, Continuum Economics
But the softer than expected May CPI data and the prospect of a June outcome around 2.6%, could materially change MPC thinking may be diluted beyond the current ne seem likely. Regardless, it is worth noting that base effects are not the full story as not only are adjusted, smoothed m/m data offering more subdued signs but also are more benign (Figure 2) and still stable company expectations and also actual recent wage pressures. But obviously, the CPI data again showed little, if any sign of second-round effects, possibly the opposite especially looking at adjusted m/m numbers.