UK shop price index maintains upward trend

Emily Nicol
Chris Scicluna

Flash German inflation set to decline in June thanks to temporary policy measures to ease impact of high energy costs; but Spanish flash inflation significantly exceeds expectations
Today’s first flash estimates of inflation in June from the euro area member states have so far provided mixed messages. While the full German data are not out until lunchtime, CPI inflation in the two largest states – North Rhine-Westphalia which accounts for more than 20% of national GDP, and Bavaria which accounts for more than 18% of national GDP – fell back thanks in large part to temporary government measures to ease the impact of higher energy costs. Indeed, in NRW, CPI inflation fell a steep 0.6ppt to 7.5%Y/Y. While inflation of food and fuels rose again, services inflation dropped a full 1ppt to just 1.7%Y/Y due to a big drop in transportation inflation (down more than 8ppts to 7.7%Y/Y) thanks not least to the government’s special national summer rail pass (just €9 per month). Of course, once that special pass expires in September, the transport component will rebound, and so these figures don’t necessarily imply an easing of underlying price pressures. But, for the time being, with Bavaria’s CPI rate also down (albeit by just 0.2ppt to 7.9%Y/Y) today’s German national data for June are at least set to post declines from May’s multi-decade highs of 8.7%Y/Y on the EU-harmonised HICP measure and 7.9%Y/Y on the national CPI measure.

In marked contrast, today’s Spanish figures surprised massively on the upside, with the headline HICP rate jumping 1.5ppts to 10.0%Y/Y, having been expected to rise just 0.2ppt. The national measure similarly rose 1.5ppts to 10.2%Y/Y, the highest rate since August 1985. While there is no detailed breakdown with this preliminary release, the Spanish statistical office (INE) noted that the latest developments were principally driven by higher fuel and food prices. But with certain services prices – i.e. hotels, cafes and restaurants – having been boosted by the reopening of the tourism sector, INE also confirmed that the national core CPI measure rose 0.6ppt to 5.5%Y/Y, the highest since August 1993.

Commission’s sentiment surveys set to confirm loss of momentum
The flow of sentiment indicators for June continues this morning with the European Commission’s consumer and business survey results, which typically provide the most comprehensive guide to euro area economic activity. Consistent with yesterday’s downbeat German and French consumer surveys, the aggregate euro area index is expected to align with the Commission’s preliminary estimate which fell to its lowest level since the euro crisis in 2013. And as suggested by the flash PMIs, we expect the Commission’s business confidence indices to signal a loss of momentum in both manufacturing and services. Indeed, the headline economic sentiment indicator is forecast to decline 2pts to 103.0, which would make the lowest reading since February 2021, albeit still well above the trough at the onset of the pandemic (61.0). This morning will also bring the euro area bank lending figures for May.

Of course, this afternoon’s policy panel at the ECB’s Sintra central banking forum will be watched, with ECB President Lagarde, BoE Governor Bailey, Fed Chair Powell and BIS head Carstens likely to signal the need for further significant monetary policy tightening ahead.

Japanese retail sales on track for solid growth in Q2, but a marked drop in consumer confidence raises uncertainties about the near-term spending outlook
Japan’s retail sales came in a touch softer than expected in May. Nevertheless, they were still up for the third consecutive month, and by 0.6%M/M to leave them up 3.6%Y/Y. Of course, some of this strength will reflect higher prices, with our estimate for real retail sales down around 1½%Y/Y. Within the detail, the value of clothing sales rose a further 5.2%M/M to be trending some 11½% higher than the Q1 average. Meanwhile, sales of food (0.5%M/M) and fuel (2.5%M/M) seem bound to have been boosted by prices despite the government’s energy support measures. And sales of household goods and autos fell in May, likely reflecting to some extent ongoing supply constraints. Overall, sales were trending so far in Q2 a little more than 2% higher than the Q1 average. And with spending on services set to have been boosted by the lifting of restrictions, household consumption should help support a return to positive GDP growth this quarter.

The near-term outlook for spending, however, remains more uncertain. Today’s consumer confidence survey was very disappointing, with the headline sentiment index unexpectedly declining 2pts in June to 32.1, the lowest since January 2021. The weakness was broad based, with households more downbeat about expectations for both the economic outlook and income expectations. And so, their willingness to buy durable goods also maintained a downwards trend – indeed, the relevant survey index fell a further 2.6pts to 25.3, some 13pts lower than a year earlier and the second-lowest reading since the series began four decades ago.

UK shop price index rises to highest since 2008 as food price inflation jumps
The BRC’s shop price index unsurprisingly maintained an upwards trend in June, with its measure of inflation rising 0.3ppt to 3.1%Y/Y, the highest since 2008. Despite fierce competition among retailers and a drive to expand their value ranges, once again the upwards inflationary impulse was reflected in the survey’s measure of food inflation, up 1.3ppt to 5.6%Y/Y, the highest for eleven years, with fresh food prices up more than 6%Y/Y, the most since 2009. In contrast, non-food inflation edged slightly lower (down 0.1ppt to 1.9%Y/Y), with clothing inflation (-3.7%Y/Y) seemingly impacted by summer discounting. While retailers continue to absorb much of the additional costs, persisting price pressures are likely to be increasingly passed on to consumers of a wider range of goods over coming months. And of course, not least due to the exclusion of prices of energy, cars and services, the BRC survey measure of shop price inflation will continue to track well below CPI inflation.

US updated GDP estimate to confirm contraction in Q1, possibility of downwards revision to household consumption
A relatively quiet day for US economic releases brings updated Q1 GDP figures. The consensus on the Bloomberg forecast is for these to confirm that the economy contracted by 1.5%Q/Q annualised, reflecting a large negative contribution from net trade. But household consumption might well be revised lower on the back of spending on services, and our colleagues in the US expect these only partly to be offset by upwards adjustments to construction and inventory investment.

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