UK inflation rises to 30-year high

Chris Scicluna
Emily Nicol

UK inflation beats expectations again rising to a new 30-year high
Once again, UK inflation beat expectations, with the headline CPI rate rising 0.7ppt in February to 6.2%Y/Y, the highest since March 1992. On the month, prices rose 0.8%M/M, the most in any February since 2009. Energy The principal driver to the rise in the annual rate last month was non-energy industrial goods, inflation of which rose 1.6ppts to a new high of 7.4%Y/Y, as firms sought to pass on recent cost pressures to consumers. Within the detail of that component, inflation of clothing rose 2.7ppts to 8.8%Y/Y, furniture and other household items rose 0.7ppt to 9.1%Y/Y, and used cars rose almost 2ppts to 30.6%Y/Y. And the typically volatile item of games, toys and hobbies jumped almost 8ppts to 1.5%Y/Y reflecting new releases. Meanwhile, while services inflation rose just 0.1ppt to 3.4%Y/Y, core inflation rose 0.8ppt to 5.2%Y/Y. Inflation of food and non-alcoholic beverages was also higher, rising 0.7ppt to 6.2%Y/Y, the highest in more than a decade. But, while energy prices rose 1.0%M/M, for a second successive month their annual rate of inflation edged lower, falling 0.5ppt to an admittedly still astronomical 22.8%Y/Y, reflecting a slightly softer pace of increase of petrol prices at the pump.

Headline inflation set to exceed 8%Y/Y in April, real incomes to fall most in decades despite new government measures
Looking ahead, while a cut in petrol duty today from the government might limit somewhat the energy component again this month, the overall impact is likely to be modest. Indeed, with ongoing cost pressures – reflected in part by further increases in input and output PPI inflation to 10.1%Y/Y and 14.7%Y/Y – likely to be passed on to consumers of a range of goods and services, we expect further rises in the headline CPI rate to above 6½%Y/Y and the core rate to about 5½%Y/Y in March. And due to the hike of more than 50% in the regulated household energy price cap in April (and although the ONS has yet to opine on the statistical treatment of the government’s “loan” to temporarily reduce bills this year) we expect headline inflation to jump above 8%Y/Y in April, with risks of a second peak above 8% to come in October. And while Chancellor Sunak will set out measures later today to try to limit the (economic and/or political) collateral damage, real household disposable incomes are still likely to decline the most in 40 years this year. And so, we continue to expect the BoE to hike rates by less than current market pricing this year.

UK spring statement to offer only modest fiscal support to offset rising prices
Indeed, in terms of UK fiscal policy, the Chancellor’s spring statement (at 12.30GMT) should bring a handful of new budgetary measures, including a cut in fuel duty as well as an increase in welfare benefits. And while he is highly unlikely to delay the planned rise in National Insurance Contributions (NICs) due next month, he might increase the income threshold at which those NICs are paid. Additional spending on defence is also likely. But the UK government seems likely to eschew some of the more direct measures – including more substantive price caps on energy and windfall taxes on energy companies – currently favoured by many EU member states. Nevertheless, yesterday’s monthly public finance figures certainly suggested some scope for additional public spending. Indeed, despite coming in a little higher than expected in February as public spending on debt interest continued to rise due to high inflation, public sector net borrowing was still on track to come in some £26bn lower in the current fiscal year than the OBR previously expected.

Japanese prices pressures starting to broaden, with trimmed mean CPI at highest since 2008
Another relatively quiet day for Japanese economic releases brought the BoJ’s estimates of underlying inflation. Last week’s main inflation measures saw the headline CPI rate jump 0.4ppt to 0.9%Y/Y, a three-year high. But when excluding food and energy, the internationally comparable core measure of inflation remained very weak at -1.0%Y/Y. Admittedly, this weakness in part reflects special factors relating to the government’s decision to cut mobile phone tariffs last April – base effects of this decision continue to knock 1.5ppts off headline CPI. But on the whole, today’s data from the BoJ illustrated the moderate pickup in underlying price pressures over recent months. For example, the share of items in the CPI basket with prices increasing rose in February to 64%, the most since August 2016. And the 10% trimmed mean CPI rose 0.2ppt to 1.0%Y/Y, the highest since October 2008, albeit still well below the US and euro area measures of trimmed mean CPI at 5.7%Y/Y and 4.3%Y/Y respectively as well as the BoJ’s 2% inflation target.

Euro area consumer confidence expected to fall to its lowest in at least a year
Looking ahead to the rest of the day, the European Commission’s preliminary consumer confidence index for March is likely to report the sixth successive monthly drop to the lowest level in at least one year as the Ukraine war raises uncertainty over the near-term outlook amid surging price pressures.

US new home sales numbers to report modest bounce back
On the US data front, today brings just new home sales figures for February. Home builders reported a drop in buyer traffic last month, although the prospect of higher mortgage rates could push some to bring forward their home purchase.

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