UK inflation rises to series high

Chris Scicluna
Emily Nicol

Asian stocks largely higher in the wake of Wall St. gains; China down as house prices drop again and Covid cases rise
Following yesterday’s rally on Wall St., Asian stocks largely extended their rebound today buoyed not least by the firmer-than-expected US retail sales and IP data. Chinese stocks fell slightly (the CSI300 was down 0.35%), however, as the number new coronavirus cases ticked up in Beijing and certain other cities, while new house prices fell for an eighth successive month (dropping 0.3%M/M to be down 0.1%Y/Y with prices up on the month in just 18 of the 70 cities). But with Japanese GDP in Q1 falling a touch less than expected (down 1.0%Q/Q annualised, see detail below), the TOPIX closed up almost 1.0%. By and large, European markets have opened slightly higher but US stock futures are pointing down. In forex markets, sterling has slipped back after the admittedly big rise in UK inflation to a more-than-three-decade high failed to surprise on the upside for a change (more on this below too).

USTs broadly stable after yesterday’s losses, Gilts open higher despite UK inflation rising to series high
Having risen sharply yesterday after the better-than-expected US data and Fed Chair Powell reiterated that rates would continue to be hiked until inflation is on the way down in a ‘clear and convincing way’ and could well go above neutral levels, USTs have stabilised somewhat overnight, with yields down between 1-2bps. In the Asia-Pacific, ACGBs followed yesterday’s drop in USTs despite a slight downside surprise in the latest Aussie wage data. And 10Y JGB yields remained close to the BoJ’s YCC upper limit as the Japanese GDP figures didn’t disappoint. But while euro area govvies are also broadly stable this morning, Gilts opened higher (10Y yields initially down around 3bps) following the UK inflation data.

UK CPI inflation up to 9%Y/Y, broadly as expected but with widespread pressures
Broadly in line with expectations, UK CPI inflation rose 2.0ppts in April to 9.0%Y/Y, the highest on the series dating back more than three decades. And RPI inflation rose 2.1ppts to 11.1%Y/Y, a four-decade high. A big jump in inflation last month was always inevitable in light of the increase of 54% in the regulated household energy price cap. And indeed, with auto fuel prices up too despite the government’s modest fuel duty cut, overall energy prices rose more than 25%M/M to be up a series high 52.2%Y/Y and contributing a little more than one third (3.5ppts) to overall CPI inflation. However, the pressures in the UK are undeniably broad-based – indeed far more so than in the euro area where energy accounts for roughly half of all inflation.

Indeed, in the UK, food inflation rose a further 0.9ppt to 6.7%Y/Y, the highest since 2009. With inflation at restaurants and hotels continuing to rise (up 1ppt to 7.9%Y/Y), services inflation rose 0.7ppt to 4.7%Y/Y, also the highest since 2009. Inflation of non-energy industrial goods was steady at 7.9%Y/Y, as additional pressures in certain items (e.g. garden furniture prices up 32.8%Y/Y!) was offset by a drop a slight moderation in clothing (down 1.8ppts to 8.4%Y/Y) and second-hand cars (down 4ppts to 27.0%Y/Y). So, core inflation rose 0.5ppt to 6.2%Y/Y, the highest in thirty years.

Of course, cost pressures remain intense. While input producer price inflation was steady at 18.6%Y/Y in April, the output PPI rate rose a much larger-than-expected 2.1ppts to 14.0%Y/Y. Labour costs are rising above levels consistent with the inflation target, a key driver of the services component. And firms’ pricing behaviour suggests a much greater willingness to pass on costs to customers, perhaps reflecting the diminished level of competition in the UK economy post-Brexit. So, inflation looks set to average a little more than 9%Y/Y this quarter. And while base effects should allow it drop back in Q3, the likely further substantive (plus 30% perhaps) rise in the household energy price cap in October will likely push CPI inflation above 10%Y/Y in Q4.

Japanese GDP contracted in Q1, but economy fared slightly better than expected
Today’s Japanese GDP data confirmed that the economy contracted in Q1, but the decline of 0.2%Q/Q was softer than had been expected. With growth having been revised slightly lower in Q4 (by 0.2ppt to 0.9%Q/Q) this still left output 0.7% lower than the pre-pandemic level in Q419 and some 3½% lower than the pre-tax-hike peak in Q319. Despite the sharp spike in Covid cases and associated restrictions, private consumption merely moved sideways as spending on services fell just 0.2%Q/Q, far less than in previous pandemic waves, and stronger consumption of non-durable goods offset a modest drop in durable goods. Private capex rose for the second successive quarter (0.5%Q/Q), with government consumption and a build-up of inventories also adding to growth. But in spite of various fiscal support packages, public investment fell for the fifth consecutive quarter to be more than 10% lower than the pre-pandemic level. And reflecting a sharp pickup in imports, net trade subtracted a sizeable 0.4ppt from GDP growth.

Reuters Tankan paints mixed picture for business conditions in May
Looking ahead, today’s Reuters Tankan survey offered mixed messages. Encouragingly, this signalled a further notable improvement in services sector conditions in May, with the headline diffusion index (DI) rising 5pts to +13, the highest since February 2020, reflecting greater optimism among transport and wholesale firms. In contrast, however, manufacturers became the least upbeat for more than a year, reflecting rising input costs that have been exacerbated by the weaker yen as well as ongoing supply-side disruptions. Indeed, the headline manufacturing DI fell 6pts to +5, the lowest since February 2021, with auto manufacturers the most downbeat since the summer of 2020. And construction firms were the most pessimistic since the aftermath of the Great Japan Earthquake and Tsunami in 2011. Overall, manufacturers and non-manufacturers alike expected no improvement over the coming three months either.

Euro area inflation set to be confirmed at record high, auto sales slump in April
In the euro area, today brings the aggregate euro area final inflation release for April. Headline HICP inflation is expected to confirm the flash estimate of 7.5%Y/Y, up 0.1ppt from March, although yesterday’s downwards revision to the Italian rate raises downside risks to the euro area figure. Nevertheless, these data are still expected to confirm a broadening of price pressures, with euro area core inflation set to be confirmed at 3.5%Y/Y, up 0.6ppt on the month and a new record high. This release will also provide the more granular detail, allowing for calculation of other estimates of underlying price pressures including trimmed means. Separately, euro area new car registrations numbers for April published by the ACEA this morning confirmed that sales dropped 22.1%Y/Y to just 578k, the second-weakest outturn for that month since the series began and more than 40% lower than the equivalent period in 2019, as supply-side disruption combined with a weakening in consumer confidence weighed on sales last month.

US housing starts to ease as elevated inventory and higher mortgage rates weigh
Focus in the US today turns to the housing market, with March housing starts and weekly mortgage applications numbers due. With homebuilders holding an elevated inventory of unsold properties and higher mortgage rates and elevated prices weighing on sales, builders may well trim single-family housing starts in April. The volatile multi-family sector surged 15.8% in February and March to the highest level of the current expansion, suggesting some payback in April. Philadelphia Fed President Harker is due to discuss the economic outlook.

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