UK Inflation Eases in April, but Services Inflation Concerns Persist
Economic news and commentary for May 24, 2023
NOTE: I will be moving for the next few days, so there will not be an Econ Mornings posted on Thursday and Friday. I will be back after Memorial Day.
UK CPI & PPI
In April, the UK's CPI experienced a moderate increase of 1.2% on a monthly basis and a significant 8.7% year-on-year (YoY) growth, compared to the 10.1% YoY rise recorded in March. This drop in inflation was primarily driven by a decline in energy prices, specifically electricity and gas. While energy prices contributed to the fall in annual inflation, they still accounted for a substantial portion of overall inflation.
The general energy index witnessed a monthly decrease of -1.3%, with the annual rate of energy price growth declining from 40.5% YoY in March to 10.8% YoY in April. Deflation in energy prices was also evident in the PPI readings. In the input PPI, the crude oil segment was down -17.7% YoY, and in the output PPI, the petroleum products index was down -23.8% YoY. Unfortunately, energy was the only sector that experienced substantial deflation, providing some relief for consumers. The positive impact of declining energy prices was offset by a sharp rise in food prices. Food prices surged by 2.0% on a monthly basis, driving the annual food inflation rate to 16.0% YoY. These persistent increases in food prices nullified the decline in energy prices, resulting in a slight monthly rise of 0.8% for all goods prices. Nevertheless, the annual pace of general goods inflation did slow down, dropping from 12.8% YoY to 10.0% YoY. It is likely that goods inflation will continue to trend lower despite rising food prices. Manufacturing input and output prices, in the PPI report, continued to cool in April, down -0.3% MoM and flat respectively. The YoY increases for both fell considerably as well, down -3.4 ppts to 3.9% YoY and down -3.1 ppts to 5.4% YoY.
The Bank of England's main concern now lies with services prices, which continue to rise due to a tight labor market and high wages. In April, services prices grew by 1.6% on a monthly basis, reaching a new high of 6.9% YoY. The travel and transport sector saw the largest increases, with prices rising by 3.3% on a monthly basis and 7.2% YoY. The substantial increases in service prices have contributed to sticky core CPI inflation. After experiencing a decline at the beginning of the year, core CPI inflation has risen to a new high of 6.8% YoY. This trend suggests that the cost of services remains a significant challenge for the Bank of England.
While the fall in energy prices is a positive development for the UK and the central bank, as it addresses one of the main concerns in the cost of living crisis that emerged in 2022, new price pressures have emerged. Wages and services have become the primary drivers of inflation, with the persistent increases in travel costs indicating that post-pandemic demand is still robust and supported by strong incomes. Given these circumstances, there is a possibility that the Bank of England may consider another quarter-point rate hike.
Still to come…
10:00 am (EST) - EU Consumer Confidence Flash
7:30 pm - Reserve Bank of Australia Minutes
Morning Reading List
Other Data Releases Today
The German Ifo Business Climate Index fell to 91.7 in May, down from 93.4 in April, the first decline in 6 months. The Business Situation index fell -0.3 pts to 94.8, and the Expectations index fell -3.1 pts to 88.6.
The Australian Westpac Leading Index fell to -0.78% in April, down from -0.69% in March. This is the 9th straight negative reading. Weaknesses in construction and commodities weigh on the index.
The ONS UK House Price Index was up just 4.1% YoY in March, down from 5.8% YoY in February. The average UK house price was £285k in March, which is £11k higher than 12 months ago, but £8k below the recent peak in November 2022.
UK CPI
UK inflation shock raises chance of June rate hike (ING) - UK inflation came in way higher than expected in April, which undoubtedly puts pressure on the Bank of England to hike by another 25bp in June.
German Ifo
New growth concerns for Germany after latest IFO numbers (ING) - The latest IFO numbers end a six-month rally of surging optimism. It's yet another illustration that confidence seen at the start of the year has been replaced by new growth worries.
PMIs
Eurozone Flash PMI at three-month low as steepening factory downturn offsets services revival (S&P Global) - Eurozone business output grew for a fifth straight month in May, according to the latest HCOB flash PMI survey data produced by S&P Global, pointing to robust economic growth so far in the second quarter.
May flash PMIs - Widening gap between manufacturing and services (ABN AMRO) - Flash PMIs for both the US and the eurozone point to a widening divergence between manufacturing and service sector performance.
Flash PMI data signal fastest developed world growth for 11 months, price pressures rise further (S&P Global) - Economic growth across the four largest developed economies has accelerated to the fastest for 13 months in May, according to early 'flash' PMI data compiled by S&P Global. Growth was driven entirely by services, however, as manufacturers continued to report broadly stalled production.
US
On‑and‑Off‑and‑On‑Again Progress Toward a U.S. Debt Ceiling Agreement (PIMCO) - We remain constructive on a deal coming together in time to avert a default on U.S. debt, though we expect continued drama in the very near term.
Financial Stability and Interest Rates (Liberty Street Economics, NY Fed) - In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions.
The Rise and Fall of M2 (St Louis Fed) - M2 is a broad measure of the money supply, including currency and various sorts of bank and money market mutual fund deposits that are relatively liquid. Figure 1 shows that the year-over-year growth rate of M2 has behaved very unusually since February 2020: M2 grew at record rates during the COVID-19 pandemic from February 2020 through 2022 but has declined at record rates since late 2022. The 26.9% rate of year-over-year growth in February 2021 easily exceeds the rates of growth during either the quantitative easing programs of 2008-15 or the inflations of the 1970s and 1980s.
Inflation
Inflation Remains a Burden and Consumer Debt is on the Rise (Cleveland Fed) - The Federal Reserve Bank of Cleveland’s Community Issues Survey (CIS) collects information semiannually from direct service providers to monitor economic conditions and identify issues impacting low- and moderate-income (LMI) households in the Fourth District—a region that includes Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. In March 2023, we surveyed more than 600 service providers who directly serve LMI individuals and communities across our District and received 95 responses (15 percent response rate).
Inflation Monitor for May 23 (BMO) - The path back to the 2% inflation target will likely be choppy.
Energy
How Natural Gas Market Integration Can Help Increase Energy Security (IMF) - Closer ties allowed Europe to find new natural gas sources after Russia’s supply cutoff, and growing global export capacity can reduce market fragmentation.
Crude oil bounces with short sellers back in focus (Saxo Bank) - Crude oil prices trades rangebound and considering the recent news flow which on balance has been mostly price negative, it may indicate the month-long sell-off has run its course with consolidation the focus ahead of a bounce later.
Real Estate
New Home Sales Increase Again in April: Builders Continue to Benefit from Low Resale Inventory (Wells Fargo) - New home sales rose 4.1% to a 683,000 annual rate in April, the second consecutive monthly uptick. Stabilizing buyer demand has lifted the pace of new home sales 25.8% above the recent bottom hit in July 2022 (543,000).
New Single-Family Home Sales Increased 4.1% in April (First Trust Portfolios) - New single-family home sales increased 4.1% in April to a 0.683 million annual rate, beating the consensus expected 0.665 million. Sales are up 11.8% from a year ago.
Multifamily Built-for-Rent Share Remains Elevated (NAHB) - According to NAHB analysis of quarterly Census data, the count of multifamily, for-rent housing starts remained elevated during the first quarter of 2023. For the first quarter, 127,000 multifamily residences started construction. Of this total, 123,000 were built-for-rental use.
Lack of Resales Provides Boost to New Home Sales in April (NAHB) - Stabilizing mortgage rates and a lack of resale inventory provided a boost for new home sales in April, even as builders continue to wrestle with rising costs stemming from shortages of transformers and other building materials and a persistent lack of construction workers.
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