UK Inflation Surprises Again in May, Bank of England to Stick to Hiking
Economics news and commentary for June 21, 2023
UK CPI & PPI
In most parts of the world, inflation is taking the tumble, but in the UK, the problem just won’t go away. In May, annual CPI inflation came in higher than expected, up 8.7% YoY (forecasted 8.5% YoY) with a strong monthly rate of 0.7% MoM which was also higher than the forecast (0.4% MoM). While most categories saw prices rise, energy was one area where there was deflation. On the month, energy prices fell -1.1% MoM which lead to a decline in the annual pace. However, energy prices are still up a strong 8.4% YoY. This is much lower than the peak of 59.0% YoY, but higher than comparable developed economies. Similarly, annual food inflation is still high at 15.6% YoY after another strong monthly increase of 0.8% MoM. The YoY rate is just 0.4 ppts below the peak set last month at 16.0% YoY. While the improvement in food pricing was small, it did help to keep the overall CPI annual growth rate in May unchanged.
The declines in the volatile components of the CPI were crucial because the core segments of UK inflation continued to get worse in May. Core CPI inflation increased to its highest level so far at 7.1% YoY, up from 6.8% YoY previously, on an increase of 0.8% MoM. Services inflation continued to be the main inflammatory segment as it also broke through the 7% level to 7.4% YoY on a robust 0.8% MoM increase. The travel & transport services (1.8% MoM) and recreational & personal services (1.0% MoM) segments both surged as wage pressures and lingering demand in the services sector prevailed to allow businesses to keep prices high. These areas made up for the more tame increase in housing services prices of just 0.3% MoM. Strong goods inflation was probably more of a surprise in this report. Non-energy industrial goods prices increased 0.7% MoM to 6.8% YoY which is just shy of the peak set a year ago. The growth was lead by strong increases in housing (1.1% MoM), clothing (1.3% MoM), and household (1.2% MoM) goods.
On the producer side, there was significant moderation in input prices and output prices but only because of energy. UK input prices were up 0.5% YoY in May, down from 4.2% YoY in April. Output prices were up 2.9% YoY, down from 5.2% YoY. On a monthly basis, producer input prices fell by -1.5% MoM and output prices by -0.5% MoM. The deflationary trend was strongly impacted by energy prices. In the input PPI, crude oil made a substantial -2.92 ppt negative contribution, and in the output PPI, petroleum made an even stronger -3.42 ppt negative contribution. In many other areas, producers are still seeing inflation. Food input prices grew 0.6% MoM and 15.1% YoY, and the general other inputs category was up 5.4% YoY (down only -0.1 ppts). Coming out of the factory, food prices were still up 11.5% YoY in May, and clothing prices were up 8.6% YoY. The gradual decline in producer prices is undoubtedly causing consumer inflation rates to remain sticky.
Inflation is not just sticky but unexpectedly sticky. As the Bank of England continues to see their forecasts beat by monthly inflation data, the appetite for increasing interest rates grows. In turn, the BoE should continue its rate hiking campaign well in Q3 and possibly through the end of the year if there is reason to. Alternatively, the option is on the table to be more aggressive with rate hikes and move back to the 50 bps hikes for a short period. However, with banking discomfort expressed a few months earlier, it is unlikely that any G7 central bank is likely to move at this pace, the UK included. I suspect two more rate hikes are given before the situation becomes more data-driven. But based on the current trend of the data, the situation will call for more rate hikes beyond the two.
Still to come…
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Morning Reading List
Other Data Releases Today
UK house prices were up 3.5% YoY in April, down from 4.1% YoY in March. The average UK house price was £286,000 in April, which is £9,000 higher than 12 months ago, but £7,000 below the recent peak in September 2022.
The Westpac Leading Index fell to -1.09% in May from -0.78% in April. This is the 10th consecutive negative reading. Westpac recently revised down its forecasts for 2023 and 2024, from 1% and 1.5% to 0.6% and 1.0%.
Canada's retail sales (value) grew 1.1% MoM in April. In volume terms, sales were up just 0.3% MoM. Sales increased in 8/9 subsectors and were led by increases at gen merch (+3.3% MoM) and food & beverage (+1.5%).
UK Inflation
UK inflation shock piles pressure on the Bank of England (ING) - The bar is set pretty high for the Bank of England to accelerate the pace of rate hikes to 50 basis points this week. But another inflation shocker all but guarantees a 25bp hike tomorrow and another in August.
US Housing Starts
Housing starts and permits vastly outperform expectations in May (TD Bank) - Housing starts rose by 21.7% month-on-month (m/m) in May to 1.63 million (annualized) units, well above the consensus expectation for 1.40 million units. Revisions to the two prior months were negative, subtracting roughly 52k units from the previous reported tallies.
Single-Family Starts Post Solid Gain in May (NAHB) - Limited existing inventory combined with solid demand and improving supply chains helped push single-family starts to an 11-month high in May. This occurred despite elevated interest rates and ongoing challenges for housing affordability.
You Got a Fast Car: U.S. Housing Starts Speed in May (BMO) - U.S. housing starts rocketed in May by the most since 2016 while building permits also ramped up. The much stronger-than-expected figures suggest residential construction is improving, despite elevated mortgage rates. The Fed's work may not be over.
Housing Starts Surge in May: May Delivered a Broad-based Jump in Starts and Permits (Wells Fargo) - Residential construction appears to be gathering momentum despite higher interest rates. Total housing starts soared 21.7% over the month to a 1.63 million-unit annual pace during May. While total starts are still down 15.5% on a year-to-date basis, May's surprising upturn was the strongest since October 2016 and the eighth largest monthly gain since at least 1959. On a monthly basis, residential construction data tends to be highly volatile and often arrives with heavy revisions to prior month's data. That noted, May's jump was broad-based across single-family and multifamily starts and permits.
Housing Starts Increased 21.7% in May (First Trust Portfolios) - Housing starts surged well above expectations in May, crushing the forecast from every economics group and putting in the largest monthly gain in the number of homes started since January 1990. Looking at the details, gains were broad-based with three of four major regions and both single-family and multi-unit starts contributing.
US
Is the Recession Threat Dead? (First Trust Portfolios) - Lately, it’s been easy to see the optimism. As of the Friday close, the S&P 500 is up 15% so far this year (not
including dividends) and up 23% (again, without dividends) versus the lowest bear-market close back in October.
LIBOR's Saga Concludes (Northern Trust) - LIBOR was a crucial piece of the financial fabric until 2008, when researchers found disparities when comparing BBA panelists’ steady estimates against their banks’ rising risks. Banks’ credit-default swap (CDS) spreads were rising, reflecting justifiable worries about each firm’s condition, which should have elevated their funding costs; however, their LIBOR submissions did not increase.
US Weekly Economic Commentary: ‘Couple years out’ (S&P Global) - In May, the prices of nonfuel imports and nonagricultural exports continued to slip. The producer price index, dragged down by sharp drops in the prices of food and energy, declined 0.3%. The consumer price index (CPI), restrained by a steep decline in the price of gasoline, rose just 0.1%. However, the core CPI — which excludes the volatile prices of food and energy that are little influenced by monetary policy in the near term — rose 0.4% for the third consecutive month, and the fifth time in the last six months.
Remarks on the Panel “Bank Crisis Framework: Learning from Experience” (Richard Ostrander, New York Fed) - Remarks at the Paris Meeting of the Committee on International Monetary Law of the International Law Association (MOCOMILA), Paris, France.
Is Work-from-Home Working? (Liberty Street Economics, New York Fed) - Though some offices have re-opened as the pandemic has receded, many workers have continued to work from home. Recent survey data suggest that workers would like more remote-work days than firms want to supply—a pattern that was evident even before the pandemic. Why have firms been so reluctant to offer remote work? And what will the recent seismic shift in remote work mean for the economy?
Europe
Riksbank set for 25bp rate hike as September move hangs in the balance (ING) - We expect the Riksbank to sound the alarm about recent krona weakness, but we doubt policymakers will want to pre-commit to another hike in September just yet. Officials are now walking a narrow path between bolstering the currency and minimising damage to the real estate market.
National Bank of Hungary Review: Normalisation remains a function of market stability (ING) - The National Bank of Hungary felt comfortable in continuing to cut interest rates. The 100bp cut to the effective rate is in line with consensus. The emphasis remains on cautiousness and graduality as ongoing easing remains a function of market stability.
Nordic Outlook - Too soon to celebrate (Danske Bank) - The news has mostly been good in recent months when it comes to inflation, employment and the near-term growth outlook in most major economies. However, we have yet to see the full effect of the monetary and fiscal tightening that has already happened, and inflation is still not sufficiently under control.
Canada
The Space Between Us: The Availability of Childcare will Define Canada’s Workplace (TD Bank) - The labour force participation rate among women with children under the age of 6 has skyrocketed since the pandemic. It has risen by 4 percentage points since 2020, equating to roughly 111,000 additional working women, a sharp acceleration from the 1.7 percentage point increase posted in the previous 3 years.
If they come you will build it — Canada’s construction labour shortage (CIBC) - Guesstimating the size of the housing shortage in Canada is rapidly becoming a national sport. There is no shortage of estimates using different methodologies and assumptions. The reality is that there is no one correct number. It really depends on what you are trying to measure. But what is common to
all those estimates is that they are all big.
Australia
AMW – Population surges – don’t extrapolate too far (NAB) - Australia’s population growth has surged over the past year. The surprise has been how quickly it has rebounded after borders were re-opened from November 2021.
Commodities
Commodities: No Longer A Crude Shock (Northern Trust) - In the early days of the pandemic, demand plummeted amid the first wave of stringent lockdowns. Prices of commodities ranging from food to energy to industrial metals fell sharply. But as the world started to co-exist with the virus and demand recovered, supply remained disrupted, causing a surge in global commodity prices.
Outlook
Global Economic Outlook: Climbing the wall of worries (Allianz) - Some larger economies slipped into recession earlier this year amid a difficult global economic outlook, with GDP growth averaging at only +2.5% and +2.3% in 2023-24, respectively. The manufacturing and global trade recessions dragged several economies into a technical recession in Q1 2023 (Germany, Singapore, Taiwan).
Second Quarter 2023 Quarterly Macro Themes (Guggenheim) - The Fed is deliberately and forcefully trying to weaken the economy, a strategy it must stick to in order to beat inflation. While interest rates could remain rangebound in the near term, we expect more downside toward the end of the year as more progress is made on inflation and we get closer to rate cuts from the Fed.
The Forward View – Global: June 2023 (NAB) - Fears around the US banking sector have eased since mid-May, with central banks’ focus returning to inflation (around 6.3% yoy in April) that remains well above target ranges. The ECB hiked in June, and while the US Fed paused, both banks are likely to increase rates in July.
Major forecasts: Back to work (Nordea) - We look for more tightening from both the Fed and the ECB, but now actually expect the ECB to stop its hikes before the Fed. Longer yields still have some upside left, while EUR/USD could experience a dip before rising further.
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