UK inflation once again exceeds expectations

Chris Scicluna
Emily Nicol

UK CPI inflation up again as retailers eschew usual New Year discounting
In contrast to expectations of no change, UK CPI inflation edged up again at the start of the year, rising 0.1ppt to 5.5%Y/Y, the highest since March 1992. The increase was caused by non-energy industrial goods prices, which accelerated 0.6ppt to 5.8%Y/Y, as retailers sought to pass on cost pressures to consumers and so limited the extent of their usual New Year discounting. So, for example, clothing and footwear inflation rose 2.1ppts to 6.3%Y/Y as prices were cut the least in any January on the series dating back to 1990, while prices of furniture and other household items accelerated 1.1ppt to 8.4%Y/Y, similarly a series high. Supply bottlenecks kept prices of motor vehicles under upwards pressure too, with inflation of new and used cars up 0.1ppt apiece to 3.5%Y/Y and 28.7%Y/Y.

Those pressures in goods prices more than offset the impact of a slight easing of inflation in services (down 0.1ppt to 3.3%Y/Y), which occurred despite a further pickup in housing rents (up 0.3ppt to 2.3%Y/Y). The overall softening in services likely in good part reflected the spread of the Omicron variant, which weighed on price-setting in restaurants and hotels (down 1.3ppts to a six-month low of 4.7%Y/Y) and recreation and cultural services (down 0.2ppt to 2.1%Y/Y). And inflation of transport services slowed 2.3ppts to 3.6%Y/Y, reflecting a slowdown in air, rail and bus fares. Overall, core inflation rose a further 0.2ppt to 4.4%Y/Y, also the highest since 1992. Among non-core items, energy inflation slowed 1.2ppts on lower petrol prices, but inflation of food and non-alcoholic beverages edged up 0.1ppt to 4.3%Y/Y.

UK inflation will continue to rise over the near term, likely peaking at around 7½%Y/Y in April due to higher household energy bills, while further pass-through of cost pressures from producer goods prices will also play a role (factory output inflation accelerated a further 0.5ppt to 9.9%Y/Y in January). Thereafter, inflation should decline gradually, but will still probably remain above 4.0%Y/Y at year-end. So, following yesterday’s data underscoring the tightness of the labour market, this morning’s inflation figures reinforce the inevitability of a further BoE rate hike at next month’s MPC meeting. However, given the highly adverse impact of inflation on real disposable incomes and hence demand, we continue to see a hike of 25bps in March, followed by another in May and the eventual launch of active Gilt sales, as more likely than a bumper 50bps rate increase next month.

Chinese inflation slows beyond expectations giving scope for further PBoC policy support
Chinese CPI and PPI inflation slowed in January by more than expected to give scope to the PBoC to provide further support to flagging domestic demand as soon as the current quarter. Consumer price inflation slowed 0.6ppt to a four-month low of 0.9%Y/Y. That was largely due to a 2.6pt decline in the food component to -3.8%Y/Y, similarly the lowest since September, as fresh vegetable inflation dropped almost 15ppts into negative territory and the pace of decline of meat prices accelerated slightly too. Non-food CPI inflation slowed just 0.1ppt to 2.0%Y/Y due to slowing fuel prices. Indeed, despite a pickup in services (1.7%Y/Y), core CPI (excluding food and fuel) was unchanged at 1.2%Y/Y, its level in five of the past six months.

Meanwhile, producer price inflation slowed 1.2ppts to a six-month low of 9.1%Y/Y, some 4.4ppts below October’s peak. Most major PPI components slowed, benefiting from the authorities’ ongoing attempts to ease supply pressures but also reflecting the ongoing softness of demand due not least to adjustments in the real estate sector. Inflation in the mining and quarrying sector slowed more than 9ppts to 35.0%Y/Y, down more than 30ppts from October’s peak and the lowest since April. Inflation of raw materials slowed 1.5ppts to a six-month low of 18.2%Y/Y. And manufactured goods prices slowed 1.2ppts to 7.0%Y/Y, a seven-month low, weighed by food products while inflation of clothing (1.4%Y/Y) and durable items (0.6%Y/Y) edged up.

Japanese survey flags downside risks to GDP growth in Q1
While yesterday’s GDP estimate signalled a rebound in Japan’s economy in the final quarter of last year, and the latest monthly tertiary activity numbers implied ongoing expansion into year-end – output rose for the third consecutive month (0.4%M/M) to be 2½% higher over the fourth quarter as a whole – surveys continue to flag the risk that Japan’s economy slipped back this quarter. Certainly, today’s Reuters Tankan offered a less than rosy assessment of current conditions so far this month as measures to contain the latest pandemic wave and higher cost burdens exacerbated by the weaker yen weighed on sentiment. Indeed, the headline manufacturing diffusion index (DI) declined a further 11pts to 6, an eleven-month low. And while the weakness this month was broad based across the subsectors, autos manufacturers remained the most pessimistic amid the persisting global semi-conductor shortage. The equivalent non-manufacturing DI similarly fell back, by 5pts to 3, a three-month low. While most firms expressed concerns about the impact of the omicron variant, the survey also suggested that sentiment in certain sectors had been given a boost by increased demand for dining at home and remote working. And with signs that new coronavirus cases in Japan appear to be peaking, firms were more upbeat about the outlook over the coming three months.

French retail sales slip back at the start of the year, euro area IP data to come
Given the accelerated spread of coronavirus, tighter pandemic restrictions and a drop in consumer confidence, today’s Bank of France estimate of French retail sales in January was inevitably subdued. In particular, the Bank’s survey suggested that sales fell for the third month out of the past four in January (-1.4%M/M), albeit following strong growth (1.8%M/M) in December. In light of the latest pandemic hit to consumer-facing services and hospitality in particular, food sales were surprisingly weak in January (-1.7%M/M). And there were sizeable declines in spending on clothing (-8.1%M/M), sports equipment (-9.9%M/M) and autos equipment (-11.4%M/M), although the BoF measure did suggest a further modest increase in vehicle sales as well as a jump in spending on consumer electronics (10.7%M/M). Overall, retail sales in January were some 5% lower than the pre-pandemic level, but just 0.6% lower than the Q4 average suggesting only a modest drag on growth at the start of the year.

Looking ahead, today will bring further insight into the euro area’s manufacturing sector at the end of last year, with the region’s full industrial production data for December. National figures already published revealed hefty declines in Spain and Italy, with smaller decreases in activity in Germany and France. But not least given a surge in Irish output, we expect aggregate euro area production to post an increase of around ½%M/M in December, which nevertheless would leave it almost ½% lower on the quarter

Retail sales the US data highlight ahead of the publication of the Fed minutes
Ahead of the all-important release this evening of the latest FOMC minutes, retail sales in January will be the main focus on a busy day for new US economic data. Following the drop of 2.5%M/M in December, sales should have returned to growth at the start of the year not least due to the strong rebound in vehicle sales. And with higher prices of gasoline (and other items) also likely to have provided a boost to sales in nominal terms, Daiwa America’s Mike Moran expects overall growth of 1.8%M/M, and 1.5%M/M excluding autos. Meanwhile, industrial production figures for last month are also due today – Mike forecasts a rise of just 0.3%M/M after the drop of 0.1%M/M in December with utilities output judged to make the largest contribution, manufacturing likely to post only a modest rise and the possibility of a drop in mining activity. The NAHB housing survey for February will also be released today along with import and export price data for January and business inventories figures for December.

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