UK inflation data strengthen case for BoE rate hike next month

Chris Scicluna
Emily Nicol

UK inflation up above expectations in December to strengthen the case for another BoE rate hike next month
UK CPI inflation rose further in December, up a larger-than-expected 0.3ppt to 5.4%Y/Y, the highest since 1992. Once again, the pressures on inflation appeared to be broad-based. Some of these came from non-core items, with food inflation up 2.1ppts to 4.5%Y/Y. However, for a change, with prices of petrol unchanged on the month, inflation of energy eased back somewhat, down 1ppt to 24.5%Y/Y. Meanwhile, despite the latest wave of coronavirus, inflation in restaurants and hotels jumped 0.8ppt to 6.0%Y/Y, contributing to an increase of 0.1ppt in services inflation to 3.4%Y/Y, the highest since 2013. Moreover, amid ongoing supply-chain disruption, further rises in inflation of furniture and other household items (up 1.2ppts to 7.3%Y/Y), as well as second-hand cars (up 1.5ppts to 28.6%Y/Y), and clothing and footwear (up 0.7ppt to 4.2%Y/Y), pushed inflation of non-energy industrial goods up a further 0.5ppt to 5.2%Y/Y, the highest since the early 1990s. So, as pressures further up the pipeline appear to continue to be passed on to consumers, core inflation rose 0.2ppt to 4.2%Y/Y, also the highest in 30 years.

Looking ahead, while there remains significant uncertainty regarding quite how far the regulated energy price cap will rise in April, and whether or not the government will cut VAT on home energy bills or take other measures to address the growing cost of living crisis, CPI inflation still looks likely to rise to 6.0%Y/Y or more in April. And with scope for further pass-through of producer price pressures over coming months (the output PPI rate edged down just 0.1ppt to 9.3%Y/Y in December), inflation is likely to fall back thereafter only gradually, and will remain well above the 2.0%Y/Y target by the end of the year. Into next year, much will depend on the trajectory of energy prices and private spending growth, with the latter at risk of a notable slowdown due to falling real disposable incomes. Nevertheless, with November’s GDP data having beaten expectations, the labour market tight and coronavirus restrictions set to be eased in England, the expected near-term profile for economic activity and prices is likely to persuade the BoE’s MPC to raise rates by a further 25bps in February to 0.5%.

Governor Andrew Bailey and certain other BoE officials will testify to the Treasury Select Committee later today. While the focus will be principally on the latest Financial Stability Report, it’s hard to believe that inflation and monetary policy will not get a mention. However, that Parliamentary event will be significantly overshadowed by another, as PM Boris Johnson will again face humiliating interrogation at lunchtime’s PMQs over his partygate lockdown shenanigans and his associated unconventional relationship with the truth. It is undoubtedly possible that, by the end of the day, sufficient numbers of his party backbenchers will have submitted letters to prompt a leadership challenge that might end his premiership.

Final German inflation matches flash estimates to suggest peak has now passed
This morning’s final data for German inflation in December aligned with the flash estimates to suggest that it has now passed its peak. In particular, the headline rate on the EU harmonised HICP measure fell in December by 0.3ppt to 5.7%Y/Y, ahead of what will be a bigger drop this month as base effects associated with tax changes fall out of the calculation. Admittedly, the rise in the national CPI rate of 0.1ppt to 5.3%Y/Y was also confirmed. But the pickup was marginal and this measure will also fall significantly this month in January.

Within the detail on the national measure, there was a notable easing in energy inflation last month, by 3.8ppts to 18.3%Y/Y, which, given the slightly larger energy weight in the harmonised measure, explains much of the discrepancy. In contrast, food inflation jumped 1.5ppts to 6.0%Y/Y, the highest for more than thirteen years. And non-energy industrial goods inflation rose 0.5ppt to 2.7%Y/Y, the highest since the series began in the early 1990s, with notable upwards pressure from clothing inflation (up 3.6ppts to 5.5%Y/Y), while prices of used cars rose by more than 2%M/M for third month out of the past four to be 11.7% higher than a year ago. Services inflation rose 0.2ppt to 3.1%Y/Y, the highest since 1997, with inflation of recreation and culture services the strongest since 2015. As such, the national measure of core inflation rose 0.4ppt in December to 3.7%Y/Y, but the HICP core rate eased 0.2ppt to 3.9%Y/Y. National inflation for 2021 as a whole stood at 3.1%Y/Y, from 0.5%Y/Y in 2020, the highest for almost 30 years.

Euro area construction output numbers for November are due later this morning. Contrasting with the firm rebound of 2.3%M/M reported in manufacturing production that month, activity in the construction sector is likely to have dropped following cumulative growth of more than 2½%M/M over the prior two months, weighed by declines in Germany and France. Surveys, however, suggest a positive trend in the sector over Q4 as a whole.

US housing starts data likely to post decline in December
Today’s US economic data focus will be on residential property, with December’s housing starts and building permits figures due for release. Daiwa America’s Mike Moran expects to single-family starts to slip back reflecting the elevated level of unsold homes and an above-average reading in November. Moreover, he also expects multi-family starts to post a partial retracement, and so forecasts a drop of 1.1%M/M overall.

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