UK CPI inflation hits double-digits in July

Chris Scicluna
Emily Nicol

UK CPI inflation hits double-digits with pressures extremely broad-based
Consumer price inflation in the UK passed the ignominious milestone of double-digits in July, broadly in line with our forecast but firmly above the consensus. But it likely has significantly further to rise. In particular, the headline CPI rate rose 0.7ppt – the most since April – to 10.1%Y/Y, effectively a four-decade high. Food prices – which rose the most in any single month on the series to push the annual rate up 3ppts to 12.8%Y/Y – explain almost half of the latest rise. However, there were additional pressures in every major category too, illustrating the extremely broad-based nature of UK inflation, which is thus highly likely to be met by the BoE with a further 50bps hike in Bank Rate next month.

So, within the other detail, energy inflation rose 0.5ppt to a new high of 57.8%Y/Y on increased diesel prices. Services inflation also rose 0.5ppt to a new high of 5.7%Y/Y due to a range of additional pressures, including increased rail and air fares, higher prices in hospitality and package holidays, and increased prices in other categories from insurance to care homes, where higher nominal labour costs are likely to be playing a role. And inflation of non-energy industrial goods edged up 0.1ppt to 6.6%Y/Y, with increased prices of a range of such items from toys and recreation goods to personal hygiene products. Further up the goods supply chain, output producer goods price inflation rose 0.7ppt to a new high of 17.1%Y/Y, adding to the risks that such pressures will be passed on further to consumers over coming months.

Policy decisions to come will determine extent of peak in UK inflation in Q4
Looking ahead, inflation in August and September looks set to remain close to current levels, with the impact of Europe’s drought on food prices one likely source of extra further pressure. But the profile of inflation in Q4 will depend significantly on policy decisions yet to be announced, including OFGEM’s increase in its regulated household energy price cap from October (due 26 August), an announcement by the ONS of the statistical treatment of government plans to reduce (slightly) the impact of that rise on household budgets (due 31 August), and any additional policy efforts to reduce the rise in prices from the next Prime Minister (presumably Liz Truss) once Johnson’s successor is announced on 5 September. Based on current policy settings, inflation could reach 14%Y/Y in October. And given the likelihood of further increases in the household energy price cap in January and April next year, the pace of decline in inflation in 2023 is likely to be painfully slow.

Japan’s nominal goods trade deficit widens to a record high
A busy day for Japanese releases saw the July goods trade report grab most headlines, with the nominal adjusted deficit widening to a record-high ¥2.1bn. Admittedly, the value of exports rose on the month, by more than 2%M/M to be up 19.0%Y/Y. But the value of imports increased a stronger 3.5%M/M and 47.2%Y/Y, as higher prices of imported fuel – which accounted for more than half of the year-on-year increase in total imports – was exacerbated by the weaker yen. Indeed, when stripping out prices, import volumes were up just 2.3%Y/Y. And export volumes were down 2.0%Y/Y, as notable declines in shipments to the US (-6.2%Y/Y) and China (-9.9%Y/Y) offset strong growth to the EU (+17.4%Y/Y).

When adjusting for seasonal and price effects, the BoJ’s trade figures signalled a more encouraging export performance, with volumes up for the third consecutive month and by 1.7%M/M, to leave the level more than 3% above the Q2 average. And with import volumes up a more modest 0.9%M/M to be trending around 2% higher than in Q2, today’s report suggests that net trade provided modest support to GDP growth at the start of the third quarter.

Machine orders point to solid capex growth in Q3, but outlook ahead more uncertain
Today’s machinery orders data suggested that private sector capex should offer greater support to Japan’s near-term economic recovery too. In particular, private core orders – that provide a guide to capex growth three months ahead – rose 0.9%M/M in June to leave them up more than 8%Q/Q in Q2, the strongest quarterly increase since Q420. Growth in June was underpinned by a rebound in orders placed by firms in the electrical machinery sector (28%M/M), to leave manufacturing orders up 5½%M/M (9.1%Q/Q), while non-manufacturing orders were unchanged (7.6%Q/Q). But the outlook for this quarter remains more uncertain, with private core orders forecast to fall almost 2%Q/Q. And while there was strong growth in overseas orders (31.4%Q/Q) and government orders (7.0%Q/Q), these too were expected to go into reverse in Q3.

Reuters Tankan suggests improved sentiment among Japanese businesses in August
While Japanese survey indicators, including the PMIs and economy watchers’ indices, signalled a marked deterioration in conditions at the start of Q3, today’s Reuters Tankan suggested a modest improvement in sentiment in August. In particular, the headline manufacturing DI increased 4pts to a seven-month high of +13, although this remains well below levels recorded during the second half of last year (averaging +21). While confidence grew in the chemicals, steel and oil subsectors, auto manufacturers remained extremely downbeat as supply shortages and production cuts weighed on the recovery. And overall, manufacturers expected only a slight improvement in conditions over the coming three months. The non-manufacturing DI rose for the second successive month in August, by 5pts to 19, the highest for three years, led by a rebound in sentiment among wholesalers, transport and utility firms. But confidence among consumer-facing services was reportedly dampened by the resurgence in Covid infections late last month. And overall, non-manufacturers expected no further improvement in conditions over the coming three months.

Euro area employment set to grow for fifth consecutive quarter
In the euro area, today will bring an updated reading for euro area Q2 GDP, which is expected to confirm the flash estimate of growth of 0.7%Q/Q, up from 0.5%Q/Q in Q1, to leave output 1½% above the pre-pandemic level. This release will be accompanied by euro area employment figures for the second quarter, which are also likely to report job growth for a fifth successive quarter to a new series high, albeit at the slowest rate over that period.

US focus on retail sales and Fed minutes
In the US, today brings a couple of noteworthy publications, with July’s retail sales figures to be followed by the minutes of the Fed’s 27 July meeting when the Fed Funds Rate was hiked by 75bps for a second successive month. The latter might offer few clues as to whether the FOMC will hike by 50bps or 75bps next month. And the retail sales figures will be influenced significantly by relative price changes, with lower gasoline prices likely dominating to cause a drop in total sales. Indeed, our colleagues in Daiwa America expect to see a fall of about 0.5%M/M. Ex-autos and gas, however, nominal sales seem likely to be higher (up 0.2%M/M) as higher prices offset the impact of lowest sales volumes.

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