UK inflation steadies, but peak still months away

Chris Scicluna
Emily Nicol

UK inflation steadies in May, but peak still several months away
Broadly as expected, UK inflation steadied somewhat in May, with the headline CPI rate edging up just 0.1ppt – the least since January – to 9.1%Y/Y. Nevertheless, that’s still the worst in the G7 and the highest on the series dating back to 1997, with ONS estimates suggesting that prices are now up the most since 1982. Admittedly, the increase last month was due principally to global factors, with inflation of food up almost 2ppts to a new series high of 8.5%Y/Y, and inflation of motor fuels up more than 1½ppts to 32.8%Y/Y. Modest offsets came from inflation of recreation and culture (down almost 1ppt to 5.0%Y/Y, likely related to the nature of the best-selling games at the time of the survey) and clothing and footwear (down more than 1ppt to 7.0%Y/Y), which had both provided the biggest impetus a year earlier. So, while inflation of services rose 0.2ppt to a new decade high of 4.9%Y/Y, inflation of non-energy industrial goods fell back 0.6ppt to 7.3%Y/Y. And therefore core inflation (excluding food and fuel) eased back 0.2ppt to 6.0%Y/Y.

Despite the modest increase in May, consumer price inflation has further to rise in the UK. Certainly, not least due to the impact of the ongoing conflict in Ukraine, cost pressures remained strong last month. With metals prices making the largest contribution in May, producer input prices accelerated more than 1ppt to 22.1%Y/Y, the highest rate on the series dating back to 1985. And as food prices provided an extra boost, output prices at the factory gate accelerated 1ppt to be up 15.7%Y/Y. the most since 1977. While government subsidies will absorb some of the pain, household energy prices will likely rise by about 40% in October. And with wage growth still firmly above the pre-pandemic range, services inflation will likely edge up a little further too. We forecast that inflation will peak at about 10%Y/Y in October. Assuming that energy prices reflect a path broadly in line with futures prices, we then expect a gradual downtrend over the course of next year in part reflecting substantive base effects. However, shifts in firms’ pricing behaviour post-Brexit, as well as labour shortages post-Covid, could conspire to keep inflation firmly above target into 2024, unless the UK economy experiences a non-negligible recession to push the level of GDP back down to its new (much lower) potential path.

Euro area consumer confidence set to remain at historically low level
In the euro area, the main economic focus today will be the Commission’s flash consumer confidence indicator for June. This is expected to report only a minimal improvement for a second successive month – the headline index is forecast to edge up to -20.5, from -21.1 in May – and thus remain relatively close to the series low recorded during the onset of the pandemic in April 2020, below most levels during the global financial crisis and a long way below the pre-pandemic level. Certainly, this morning’s release of the Netherlands consumer confidence survey remained extremely downbeat, with the headline index falling 2pts to -50, the lowest since the series began in 1986, and 19pts lower than the initial pandemic trough. Consumers were unsurprisingly more downbeat about the outlook for the coming twelve months, and about their expected future financial situation. And so, households’ willingness for making major purchases fell to the lowest on record too, suggesting that household spending will remained very subdued for the time being.

Powell to present Fed monetary policy report to Congress
With no US data of note due for release, all eyes today will be on Fed Chair Jay Powell’s monetary policy testimony to Congress. We expect a repeat of his post-FOMC messages that he’s “strongly committed to bringing inflation back down”, is “moving expeditiously to doing so”, the next rate hike will likely be of 50 or 75bps, and the FOMC will push rates firmly above neutral by year-end and higher still next year. While Powell noted in this post-FOMC press conference that the Fed still expects a soft landing, he seems likely to be challenged on the increasing risks of recession ahead.

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at