Stubborn, Sticky UK Inflation Remains Above 10% for the Seventh Month in a Row
Economic news and commentary for April 19, 2023
UK CPI
Inflation in the United Kingdom is sticky. UK CPI grew 0.8% MoM and 10.1% YoY in March, down from 10.4% YoY in February. This is the eighth month out of the last nine months that headline inflation was above 10% and that one month that didn’t quite reach the mark was at an equally high 9.9% YoY. The reason for this is that energy prices have not fallen as they have in other countries. The energy index did fall -0.5% MoM but is still up 40.5% YoY. This is partly because of persistently high energy prices, and partly due to base effects. It looks like April 2023’s energy index will see a significant decline from a step up in the April 2022 base. This should help headline inflation to fall substantially to the point that we could see sub-8% levels next month.
The problem is not just in energy though. Food inflation still hasn’t peaked and reached a new high in March at 15.0% YoY after growth of 1.0% MoM. Both processed food and unprocessed food inflation also rang in new highs of 21.3% YoY and 16.5% YoY respectively. Core CPI also saw a substantial increase in March, up 0.9% MoM and 6.2% YoY. This is unchanged from the February annual core inflation rate and the eighth month out of nine where core inflation was above 6%. So far in 2023, core inflation has topped the 2022 average of 5.9% YoY and doesn’t appear to have any downward momentum. Services inflation remains just 0.2 ppts off its peak of 6.8% YoY at 6.6% YoY (where it also was in Feb), and it also saw a substantial monthly increase of 0.7% MoM. Several non-energy goods categories recorded robust price gains in March: non-energy industrial goods up 1.1% MoM, household goods up 1.4% MoM, recreational goods up 1.2% MoM, and clothing up 1.6% MoM.
It’s not clear what is driving the stickiness in prices in the UK, but there could be several explanations. The first is base effects. The strongest gain in prices in 2022 looks to have come in April which means that numerically the most favorable comparisons have yet to come. However, that does not explain the strong monthly increases that we have seen. Another explanation could be that the UK, because of Brexit and the detachment from the EU, has not been able to reap the full benefits of the improvement in supply chain conditions. In the US, PPI inflation has fallen negative, and in the UK, producers’ output prices are still up 8.7% YoY (though this is down from 11.9% YoY). The last explanation could simply be that consumers are still buying things and demand remains strong. This seems less likely. Retail sales volumes in the last three months reported (Dec-Feb) are down -0.3% despite a strong February gain. However, wage growth is still strong and is supporting incomes and the ability of consumers to spend. This is why the Bank of England is still raising interest rates and hasn’t paused yet. The next meeting is in May which means there likely won’t be an insight into how much inflation falls in April. The BoE will have a tough decision to make in deciding how it wants to combat stubborn, sticky UK inflation.
Still to come…
10:30 am (EST) - US EIA Petroleum Status Report
2:00 pm - US Beige Book
7:50 pm - Japan Trade
Morning Reading List
UK input PPI grew 0.2% MoM and 7.6% YoY in March, down from 12.8% YoY in February, and output PPI grew 0.1% MoM and 8.7% YoY, down from 11.9% YoY.
Services PPI was up 4.9% YoY in Q1 2023, down from 5.3% YoY in Q4 2022.
Headline euro area #inflation was confirmed at 0.9% MoM and 6.9% YoY in March. Food and services inflation were both upgraded slightly with the former up 15.5% YoY (prev 15.4% YoY) and services inflation up 5.1% YoY (prev 5.0% YoY).
Euro area construction production increased 2.3% MoM and 2.3% YoY in February, continuing the strong 3.8% MoM growth in January. Civil engineering production increased by 3.6% MoM, and building construction production increased by 2.1% MoM.
Canada's PPI grew 0.1% MoM but was down -1.8% YoY in March, down from 1.6% YoY in February. The Raw Materials Price Index fell -1.7% MoM and was down a sharp -16.5% YoY. Prices for metal products grew on the month (4.3% MoM) but were offset by strong declines in energy (-2.7% MoM) and lumber (-8.1% MoM).
The six-month annualized growth rate in the Westpac Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, lifted slightly to –0.75% in March from
–0.79% in February.
UK Inflation
Sticky UK inflation data helps unlock May rate hike (ING) - After Tuesday’s unexpectedly high wage growth figures, the above-consensus reading on core inflation means another 25bp rate hike from the Bank of England next month is now more likely than not.
Canada CPI
Canadian CPI (Mar): Descending steeply, but still too high (CIBC) - Canadian inflation continued a steep descent in March, with that flight path likely to continue for a few more months as some of the largest monthly price increases of 2022 drop out of the year-over-year calculation.
Canadian Inflation: FORE...point three (BMO) - Canadian consumer prices rose 0.5% in March, in line with consensus and mild enough to carve the headline annual inflation rate to 4.3% from 5.2% in the prior month. Two factors cut deeply into the inflation rate even with a seemingly large monthly increase: last March saw the single biggest monthly CPI rise (+1.43%) in three decades, and March is normally a month of large price increases.
Inflation takes another step in the right direction in March (TD Bank) - Inflation continued to move in the right direction in March, supporting the Bank of Canada's stand pat rate decision last week. As outlined in our recent forecast, we expect core inflation to continue to decelerate below 3% y/y in the second half of the year, as does the Bank of Canada.
US Housing Starts
Taking the Long Way Home (BMO) - U.S. housing starts and building permits weakened in March. While that's in line with expectations given the affordability challenges in the housing market, the continued improvement in homebuilder sentiment suggests that the housing market bottom could be in sight.
Single-Family Starts Improve in March (NAHB) - Single-family production showed signs of a gradual upturn in March as stabilizing mortgage rates and limited existing inventory helped to offset stubbornly high construction costs, building labor shortages and tightening credit conditions. This is reflected in the slight uptick in builder sentiment in April.
Housing Starts Declined 0.8% in March (First Trust Portfolios) - Residential construction fell slightly in March as developers continue to navigate a challenging housing market. Looking at the details, multi-unit construction was the reason for the decline. Meanwhile single-family starts rose 2.7% for the month, rising for a second month in a row for the first time since 2021.
Housing starts and permits fell in March on multi-family weakness (TD Bank) - The declines in homebuilding activity in March were led by the multi-family segment, which saw notable month-on-month declines in both starts and permits after previously seeing strong growth to start the year. The decline in multi-family starts was more modest than the declines seen in permits, with the former still being 6.5% above year-ago levels, while the latter is down 16.9% year-on-year.
US
US Weekly Economic Commentary: Solid growth and elevated inflation still shining through (S&P Global) - Last week's data on consumer spending and industrial production for March (and including revisions to prior months) were above our expectations, while data on business inventories through February proved softer than we expected.
Looking past the peak of Fed key rates (ING) - The US Federal Reserve could soon deliver the last hike of the current cycle. While 10Y yields have seen their peak already, it will need the imminent prospect of rate cuts to re-steepen the curves. We think cuts will come before the year ends, but the Fed is still pushing a higher-for-longer narrative keeping re-steepening reflexes at bay
EU
EU Taxonomy for aviation and shipping: expanding the umbrella of transitional activities (ABN AMRO) - The EC released a draft delegated act proposing the inclusion of new activities under the Taxonomy. These include for example aviation and shipping. Research shows that a significant share of existing aircraft complies with the proposed EU Taxonomy criteria, which brings into question whether the inclusion of these activities will in fact incentivize financing towards the development of sustainable aircrafts and jet fuel.
China
China: Post-covid rebound (Nordea) - China’s GDP growth accelerated to 4.5% y/y in January-March. The post-covid rebound was strongest in services as expected. The economy is on track to meet our 6% forecast for 2023 but the risks are biased to the downside.
Mexico
Mexico | Manufacturing lost dynamism in 1Q23, although very gradually (BBVA) - The BBVA Multidimensional Manufacturing Indicator grew 3.1% in March (YoY), taking the average year-on-year variation for 1Q23 to 3.9%, 0.8 pp below the 4Q22 mean
Inflation
Measures of “Trend” Inflation (St Louis Fed) - Economists strive to measure trend inflation because it is a potentially useful guideline for predicting future inflation. But the various methods used can deviate considerably over time.
Commodities
Gold and silver consolidate with focus on US rates (Saxo Bank) - Gold reached a fresh cycle high last week at $2048/oz, coming within just 22 dollars of the 2022 record peak. Silver experiencing a 31% rally since early March, reached a one-year high above $26/oz before encountering profit taking. After such strong gains, both metals are in need of consolidating their gains, especially after relative strength indicators began flashing overbought in both metals. Overall, however, we maintain a price supportive outlook and in this update we highlight some of those supportive drivers.
Outlook
The Pre-Recession Playbook for Up in Quality (Guggenheim) - The market continues to struggle to differentiate credit risk, as evidenced by the lack of cross-industry spread dispersion. We view this as an opportunity for active management.
The Forward View – Global: April (NAB) - Banking stress in the US and Europe has been contained by the swift actions of regulators in both regions. Financial market volatility has eased and equity markets (including bank stocks) have strengthened. In the US, use of the Federal Reserve’s funding facilities is slowly normalising and bank lending has stabilised.
Previewing the April PMI surveys after global growth accelerated in March (S&P Global) - Ahead of the flash PMI releases for the US, Eurozone, UK, Japan and Australia, released on 21st April, we recap on the latest survey findings from the March S&P Global's PMI surveys and look ahead to market expectations for April.
Research
Did the Pandemic Change Who Became Behind on Rent? Characteristics of Renters Behind on Rent Before and After the Pandemic Onset (Federal Reserve) - As millions lost their jobs at the start of the COVID pandemic, many Americans risked missing their rent payments. Policymakers responded to the pandemic with hundreds of billions of dollars in government assistance and restrictions on evictions. Renters' financial well-being improved more compared to homeowners after many pandemic assistance programs were in place.1 Though mass nationwide evictions were avoided, by 2021 the percent of renters behind on rent in the past year increased to 17 percent from 10 percent in 2019 before the pandemic.2 However, among the 17 percent behind in 2021, little is known about their rent payment history before the pandemic. Were those behind in 2021 only (during the pandemic era) different from those who were also behind in 2019 (before the pandemic)? Understanding these differences has implications for the impact of recession assistance policies.
Allianz Pension Report 2023: Reforming against the demographic clock (Allianz) - Allianz launched the second edition of its Global Pension Report, which analyzes 75 pension systems around the globe using its proprietary Allianz Pension Index (API). The index consists of three pillars: Analysis of basic demographic and fiscal conditions as well as determination of the sustainability (e.g. funding and contribution periods) and adequacy (e.g. degree of diffusion and pension level) of the pension system. A total of 40 parameters are considered, with values ranging from 1 (very good) to 7 (very poor). In the weighted sum of all parameters, the evaluation of the respective system crystallizes into one overall score.
Green
Climate science vs energy security: the new challenges to reaching net zero (ING) - While climate science calls for urgent action to limit global warming to 1.5 degrees Celsius, concerns for energy security will add complexity to achieving a net zero economy. Governments and corporates should find a pathway that best suits them, set interim targets, report progress against these targets, and invest early with a long-term mindset.
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