The problem of UK inflation will just not go away: it remains as sticky as ever.
The headline number is that core consumer price index (CPI) dipped to 3.6% last month, down from 3.8% a month previously, according to the latest figures from the Office for National Statistics.
But possibly more importantly, the broader inflation measure, which includes some of the more volatile elements like energy, food, alcohol and tobacco came in at +3.8%, unchanged on the month.
Airfares were the biggest contributor to the fall in the core data, while the cost of motor fuel and dining out were the most significant upward influences on inflation during August.
The cost of goods rose by 2.8% in the year to August, its highest pace in a couple of years. Service sector inflation, which has been stubbornly high of late, eased back to +4.7% from a pace of 5.0% in the year to July.
“This morning’s UK inflation data for August will have the Bank of England thinking long and hard,” said Steve Clayton, head of equity funds at Hargreaves Lansdown. “The overall level of inflation remains elevated compared to the Bank’s target rate and these numbers were no better than forecasts.”
Although Sebastian Vismara, chief investment strategist at BNY Investments, noted a positive. “Growth has remained resilient, despite inflationary pressures and budget-related uncertainty,” he said.
Sanjay Raja, chief UK economist at Deutsche Bank also had a more upbeat spin on the numbers. “Today’s inflation data will be seen as a positive for markets – even, perhaps, encouraging,” he said. “The majority of core services measures barely budged – highlighting some of the seasonal volatility within the index due particularly to things like airfares, Euro-tunnel fares and hotel prices.”
The good news, he added, is that August inflation data has corrected some of the upside surprise we saw last month.
The bad news is that CPI has maybe a little further to go before hitting its peak.
“Indeed, food inflation continues to push higher – though survey data suggest that we may be nearing the peak on this front too. And despite better services data this morning, inflation in the largest basket remains sticky,” Raja said.
Tim Graf, head of macro strategy, EMEA at State Street Markets took a half-cup full approach to the inflation numbers. “UK inflation continues to show signs of stickiness, but today’s CPI data coming in line with consensus and Bank of England forecasts will at least reassure policymakers that the problem isn’t getting worse,” he said.
UK inflation stands at a higher than in the US, where it reached 2.9% in August, and in the eurozone where it rose to 2.1%, only slightly higher than the European Central Bank’s 2% target.
State Street’s daily measures of online prices suggest some relief in the pipeline this month.
“Though the positives are not nearly not enough to bring forward another rate cut at tomorrow’s meeting and further easing this year still looks unlikely,” added Graf.
Market-pricing cut
Indeed, the question now turns to what will the latest inflationary numbers mean for a possible interest rate cut, or indeed cuts, by the Bank of England?
“The bank looks likely to keep rates on hold when they meet tomorrow,” said Clayton. “Markets are currently pricing in just one more quarter point cut between now and the end of next year.”
Vismara sees few rate cuts on the horizon. “Set against a backdrop of mixed signals, the [Bank of England] meeting suggests few cuts in bank rate in the quarters ahead,” he said.
The issue for Vismara is that: “Inflation remains elevated, with headline CPI still nearly double the bank’s target and sticky services inflation even higher.”
Given this backdrop, the Monetary Policy Committee (MPC) is likely to maintain a “cautious stance”, added Vismara, consistent with August guidance, which placed the emphasis on easing price pressures as a prerequisite for further rate cuts.
“Looking ahead, persistent inflation – particularly in services – and resilient GDP growth provide limited scope for easing over the next 12 months,” added Vismara. “While market expectations currently point to rates falling to 3.5% by 2026, our base case assumes a higher endpoint of 3.75%.”
Raja said he continues to see a slightly longer pause when it comes to the bank’s next rate move.
“For us, the MPC may want to wait for a larger accumulation of evidence before dialling down restrictive policy again,” he said. “Seeing the downtrend in CPI begin could assuage fears on the committee that the hump in inflation is not turning into a plateau.”
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