UK CPI inflation rose to a new 40-year high

Chris Scicluna
Emily Nicol

UK inflation up to new high in June on higher prices of petrol and food
UK CPI inflation rose further in June, up 0.3ppt to 9.4%Y/Y, in line with our own forecast but 0.1ppt above the consensus on the Bloomberg survey. The rise in prices from a month earlier was again strong, at 0.8%M/M compared to an average of less than 0.1%M/M in June in the five years ahead of the pandemic. Perhaps unsurprisingly, the cause of The cause of the rise, however, was energy inflation, which rose almost 5ppts from May to a new high of 57.3%Y/Y as petrol prices rose more than 10%M/M to be up almost 42%Y/Y. Food inflation also rose to a new high, up more than 1ppt to 9.8%Y/Y.

Services inflation higher too, but core measure down on second-hand cars
Within the core components, there were also additional pressures in services (up 0.3ppt to 5.2%Y/Y), particularly with respect to air and road transport fares, and prices of package holidays, hospitality and recreation. However, inflation of non-energy industrial goods fell 0.8ppt to 6.5%Y/Y as prices of second-hand cars and audio-visual equipment fell back. So, core inflation moderated for the second successive month, down 0.1ppt to 5.8%Y/Y. On the month, however, the rise of core prices of 0.4%M/M was still well above normal for the month, with the average increase in June in the five years ahead of the pandemic effectively zero. And there remain significant pipeline pressures in the goods sector, with output producer prices up 1.4%M/M, close to the average of the past six months, to push the annual rate up to a new 35-year high of 16.5%Y/Y.

Double-digit UK inflation looks odds-on for the autumn, prompting a more hawkish BoE
So, we expect core inflation to rise back firmly above 6.0%Y/Y over the next few months. And with household energy bills to be hiked again in October, headline inflation is currently set to peak above 10 ½%Y/Y, and remain above 10%Y/Y at least until January before falling back over subsequent months. With yesterday’s data highlighting that the labour market remains tight, no surprise therefore that BoE Governor Bailey yesterday evening confirmed that a 50bps hike in Bank Rate will be discussed by the MPC in August, and that a programme of active Gilt sales is likely to be underway from the autumn.

German PPI inflation still extremely elevated despite drop in latest month
Today’s German producer price inflation data came in softer than expectations, offering some cautious optimism that pipeline pressures might be peaking for now, notwithstanding risks of additional pressures from natural gas prices ahead. In particular, the monthly increase in producer prices slowed to 0.6%M/M in June from 1.6%M/M in May and 2.8%M/M in April. And that saw the annual rate drop for the first time in 25 months, by 0.9ppt, albeit to a still-lofty 32.7%Y/Y. Energy remained the principal source of inflationary pressure, with producer prices up a further 1.6%M/M in June, although this was roughly one-quarter the average increase over the past year, with the annual rate easing 1ppt to 86.1%Y/Y.

While cost pressures and supply disruption continued to push prices of many items higher further along the value chain, today’s release similarly suggested that the impact was smaller than in previous months. In particular, prices of intermediate goods fell 0.6%M/M in June, to leave the annual rate easing to a four-month low of 22.3%Y/Y. Nevertheless, capital goods price inflation (up 0.3ppt to 7.4%Y/Y) rose to the highest since September 1975. And producer inflation of consumer goods prices increased 0.1ppt to 14.1%Y/Y.

Euro area consumer confidence set to remain near record low as concerns about the outlook continue to rise
Today will also bring the first of this week’s sentiment surveys with most notably the European Commission’s flash euro area consumer confidence indicator. Against the backdrop of higher living costs, prospects of higher interest rates and concerns about energy supply, sentiment is likely to have fallen closer to the record low logged at the onset of the pandemic in April 2020. Indeed, this morning’s survey from the Netherlands made for gloomy reading, with the headline confidence indicator edging down 1pt to -51, well below the long-run average (-1) and its lowest since the series began in April 1986. Within the detail, consumers have never been so pessimistic about the economic climate, although this largely reflected a further deterioration in conditions over the past twelve months. But with households more concerned about their future financial situations, today’s survey suggested that consumers found the time to make major purchases was more unfavourable than ever before.

BoF retail survey reports big drop in sales in June to be unchanged in Q2
The Bank of France’s latest retail sales survey suggested a marked slowdown in spending at the end of the third quarter. In particular, the survey measure of sales fell 2.6%M/M, the biggest drop since August 2021, reflecting a sharp drop in clothing and footwear (-7.6%M/M and -9.0%M/M respectively), games and toys (-7.1%M/M) and new autos (-3.3%M/M). Given the high level at the end of Q1, this still left sales broadly flat over the second quarter as a whole, implying no support to GDP growth from spending on goods last quarter. Of course, some of this weakness will reflect increased opportunities to spend on services last quarter. Nevertheless, with the share of French consumers assessing it to be an appropriate time to make major purchases having maintained a steady downwards trend, this weaker retail sales trend seems likely to continue this quarter too.

Key vote among Italian lawmakers to determine Draghi’s future as Prime Minister
Focus today will be firmly on Italian politics. Prime Minister Draghi is scheduled to address the Senate this morning, with his statement to give a clue as to whether, and if so under what conditions, he might yet be willing to stay on as Premier. And then a key confidence vote should be held this evening to determine whether the government will indeed survive, or if a snap general election will need to be held in the autumn, before the next Budget can be agreed and next tranche of EU funds can be unlocked. Reports this morning suggested that some lawmakers are increasingly confident that a deal could be reached to persuade Draghi to remain as PM and give his government a second lease of life. Certainly, voters of the parties to have originally backed Draghi – including the Five Star Movement (M5S), which withheld support for him last week – appear to want him to stay in office. And reports yesterday suggested that many M5S lawmakers might be willing to split from the party’s leader Conte to try to persuade Draghi to remain in office.

UK Tory MPs to choose the final two candidates to go head-to-head in leadership contest
In the UK, Conservative MPs will finally choose the two candidates from which party members will, over the summer, elect the successor to Boris Johnson as their leader and national Prime Minister. The result of the vote among party members will then be announced on 5 September. At this stage, former Chancellor Rishi Sunak seems highly likely to make it to the second round alongside Foreign Secretary Liz Truss (the preferred candidate of Boris Johnson and the party’s right-wing populists) with the somewhat more centrist (by current Conservative party standards) Trade Minister Penny Mordaunt now looking less likely to be the other candidate.

So far, Sunak is the only candidate not to be offering front-loaded tax cuts, instead highlighting the trade-offs related to the overall macroeconomic policy mix. Indeed, because they have no serious plans for meaningful reforms to control public expenditure, the front-loaded tax cuts being proposed by the other two remaining candidates would have to be funded largely by new borrowing and would at the margin be inflationary, requiring higher interest rates from the BoE than would otherwise be the case. Truss has also attacked the BoE, calling for its mandate to be reformed, while she has also called for a refinancing of Covid-related government debt at longer maturities. So, she would seem to intensify concerns over the credibility of policy going forward. But, by and large, none of the three candidates have detailed economic policy proposals that address the UK’s major post-Brexit structural weaknesses, and all have question-marks regarding judgement and integrity.

US existing home sales to be more stable after significant weakness previously
The flow of US housing data continues today, with existing home sales figures for June. But while a pickup in pending home sales suggests that sales of existing homes were more stable last month, this will follow a cumulative drop of roughly 16½% in the previous four months amid rising mortgage rates, elevated prices, and hence diminished affordability.

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