UK inflation up sharply to 13-month high

Chris Scicluna

Asian equity markets mostly weaker following losses on Wall Street
While Wall Street tracked sideways during the first two-thirds of Tuesday’s session, the market fell away over the last two hours of trade to leave the S&P500 down 0.9%. The exact cause of that slump – led by energy, industrial and financial stocks – was far from clear. Possible explanations ventured by commentators include worries about equity valuations, the pandemic and inflation. While we can’t rule out the latter explanation, UST yields moved sideways with the 10Y yield unchanged at 1.64%.

Whatever the reason, the softer tone has continued into today’s Asia-Pacific session with the main US equities futures contracts down between ¼-½% as we write. So while markets were closed for national holidays in Hong Kong and South Korea, bourses elsewhere in the region are mostly in the red today. Of particular note was a 1.9% decline in Australia’s ASX200, with materials, energy and industrials all sharply weaker. So even with today’s wage data proving slightly firmer than the market had expected, Aussie bond yields have finished slightly lower.

In Japan, the TOPIX has declined 0.7%, which was more typical of the losses incurred across the region. Speaking to the Research Institute of Japan, the BoJ’s Kuroda gave his standard talk on the economic outlook and reviewed the policy tweaks the Bank had made at its March Board meeting. As usual, Kuroda stated that the Bank would not hesitate to take additional easing measures if necessary, including further extending the special financing programme that is scheduled to expire at the end of September. In mainland China, the CSI300 declined a more modest 0.3%. Meanwhile Bitcoin slumped again, falling below $40k after the PBoC made clear that it would not permit financial institutions to accept cryptocurrencies as a form of payment.

Japan’s March IP growth revised down a little
In an otherwise quiet day for Japanese economic news, today METI released the final IP figures for March. Total production is now estimated to have increased 1.7%M/M – less than the 2.2%M/M increase indicated by the provisional report, but still a much stronger result than had been expected for this month. Given this revision, annual growth was revised down 0.6ppts to 3.4%Y/Y and growth in output during Q1 was revised down 0.2ppts to 2.8%Q/Q.

Elsewhere in the report, shipments grew a revised 3.4%Y/Y (revised from a 3.9%Y/Y increase) and inventories fell 9.8%Y/Y (revised from a 10.1%Y/Y decline). As always, the brand new content in today’s release concerned capacity utilisation, which in aggregate increased 5.6%M/M in March to the highest level since September 2019 (i.e., just ahead of the consumption tax hike). However, it is worth noting that firms’ productive capacity fell 0.1%M/M in March and was down 1.2%Y/Y.

UK inflation up sharply to 13-month high on energy and clothes prices
In line with the consensus view, UK CPI inflation rose a hefty 0.8ppts in April to a 13-month high of 1.5%Y/Y. The increase was principally due to higher domestic energy bills following the increase in Ofgem’s regulated price cap. Indeed, having dropped more than 4½%M/M in April last year, energy prices rose more than 5%M/M last month, pushing the annual rate for the component almost 10ppts higher to a 2-year high of 7.4%Y/Y. Clothes prices also made a contribution to the increase in inflation, rising 4.0ppts to 0.5%Y/Y, the highest in more than a year, as consumers were able to return to the shops and looked forward to reopening of hospitality and leisure activities. So, inflation of non-energy industrial goods rose 0.4ppt to 1.1%Y/Y. And with inflation of services edging up 0.1ppt to 1.6%Y/Y, core inflation increased 0.2ppt to 1.3%Y/Y. We expect a similar combination of higher energy and clothes components to push headline inflation up further in May to 1.8%Y/Y, which would be the highest since January last year. And a rise above 2.0%Y/Y from August into the first few months of next year seems highly likely too.

Euro area car registrations still well down on the pre-pandemic level in April; French retail sales drop due to renewed restrictions
Given the marked plunge a year ago during the first wave of pandemic, this morning’s European car registrations data from the ACEA manufacturers’ association inevitably reported exceptionally strong growth in April. Indeed, having near-doubled in March compared to a year earlier, car registrations in the euro area rose a whopping 265%Y/Y last month. However, at 741.8k units, that was still almost 25% lower than the same month in 2019, and about 16% below the April average in the decade ahead of the pandemic. The picture was similar across the large member states, e.g. with registrations in Germany (up 90.0%Y/Y) and France (up 568.8%Y/Y) still down about one quarter from the level in April 2019 and about one fifth below the average level for the month throughout the 2010’s.

The latest French retail sales survey from the Bank of France pointed to renewed weakness last month in response to the tightening of pandemic containment measures. In particular, the survey’s measure of sales was down 7.1%M/M with sales of non-food items down 25.7%M/M, more than offsetting growth of 2.1%M/M in food sales. Sales of furniture fell a sharp 46.8%M/M while those of textiles and clothing were down 26.3%M/M. Compared to the pre-pandemic level in January 2020 overall sales were down 7.6%, a far more modest retrenchment than seen in other “lockdown” months (sales had dropped 24.4% on the same basis in November 2020 and 33.8%M/M in April last year).

Final euro area CPI data set to confirm flash readings, with rise in headline inflation but drop in core measure
Final euro area inflation data for April are also due today. The flash estimates suggested that inflation rose 0.3ppt to 1.6%Y/Y, the highest since April 2019. As in the UK, the rise was driven principally by energy inflation, which– accelerated to the highest since October 2018. In contrast, food inflation fell to the lowest since November 2016. Prices of non-energy industrial goods rose 0.5%Y/Y, up from March but still a subdued rate to suggest that supply-side pressures are still largely being absorbed by margins. And as services inflation fell to a four-month low of 0.9%Y/Y, core inflation moderated to 0.8%Y/Y. We expect the flash estimates to be confirmed today – while French HICP inflation was revised downs lightly, the Spanish figures were revised up, and the German and Italian final data confirmed the respective preliminary readings. Also out today will be the ECB’s latest Financial Stability Review while Chief Economist Lane and highly dovish Executive Board Member Panetta will speak publicly at separate events.

No major economic data in the US today, leaving the focus on the latest FOMC minutes
On a day devoid of any significant economic data, most interest in the US today will centre on the minutes from the April FOMC meeting. The minutes will doubtless reaffirm that members were feeling more upbeat about the outlook for activity – the meeting took place ahead of the disappointing April payrolls report – but much less inclined to perceive a material improvement in the outlook for inflation. So it seems unlikely that these minutes will make for hawkish reading, especially as more recent Fed commentary has been decidedly dovish even in the face of last week’s stronger-than-expected inflation news.

Aussie Wage Price Index increases 0.6%Q/Q – slightly above market expectations, but still not enough to satisfy the RBA
Over recent months, the RBA’s Board has made clear that it believes that a material increase in wage inflation is likely to be required to drive a sustained increase in CPI inflation to levels consistent with the Bank’s 2-3% inflation target – a necessary condition for the Bank to contemplate lifting its cash rate target. Understandably, therefore, the key focus in Australia today was on the release of the Wage Price Index for Q1.

The moderately good news is that overall wages – measured excluding bonus payments – increased 0.6%Q/Q for a second consecutive quarter, which was 0.1ppts firmer than the consensus expectation. As a result, annual growth in wages nudged up 0.1ppts to a still very low 1.5%Y/Y. Of course, annual growth remains depressed by the very low readings seen in the middle quarters of last year. Encouragingly, annualized growth over the past two quarters has been slightly firmer than in the quarters leading up to the pandemic, but to some extent this may simply reflect payback from the previous restraint. In any case, even these annualized increases are unlikely to be regarded by the RBA’s Board as sufficient to generate the CPI inflation that it is seeking. Rather, we think that the RBA will be looking for growth of 3%Y/Y or higher – something last seen back in 2013.

In the detail, growth was driven by a 0.6%Q/Q lift in private sector wages, which was 0.1ppts less than in Q4 but a sharp improvement on the 0.1%Q/Q readings seen during the middle quarters of last year. At the industry level, the strongest increase was in the accommodation and food services sector, where an increase in award rates following the Fair Work Commission’s annual review lifted wages by 1.2%Q/Q. Public sector wages, which had not experienced much restraint last year, increased 0.4%Q/Q for a second consecutive quarter. Compared with a year earlier, private wages increased 1.4%Y/Y and public sector wages increased 1.5%Y/Y. It is worth noting that private wage growth looks somewhat firmer once bonuses are included, with annual growth rising 0.7ppts to a 12-month high of 1.9%Y/Y in Q1.

Attention will now turn to tomorrow’s Labour Force survey for April – the first report to capture the expiry of the Jobkeeper subsidy – to see whether the unemployment rate has continued the downward trend that will generate stronger wage growth over time.

Australian consumer confidence slips in May
In other Aussie news, the Westpac consumer confidence index fell 4.8%M/M to 113.1 in May – somewhat disappointing but still the second highest reading since April 2010 and 12pts above the long-run average for the index. Consumers were somewhat less optimistic about both the outlook for the economy and their personal finances. According to Westpac, there was no obvious difference in the responses of those that had provided their responses following the release of the Government’s Budget – which in any case was more expansionary that analyst had expected – so the decline this month may simply reflect over-exuberance in April.

Kiwi PPI inflation picks up in Q1
In common with most elsewhere, New Zealand’s PPI indexes pointed to a significant lift in pipeline inflation in Q1. While this partly reflected a rise in international commodity prices – notably for oil and dairy products – the largest contributor was an increase in wholesale electricity prices due to the impact of dry weather conditions on hydro lake storage levels. The inputs PPI increased an especially sharp 2.1%Q/Q, lifting annual inflation by 2.3ppts to 1.8%Y/Y. The outputs PPI increased 1.2%Q/Q, lifting annual inflation by 1.1pts to 1.1%Y/Y. 

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