- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
August 16, 2023
UK CPI grew 0.4% MoM and 6.8% YoY in July, down from 7.9% YoY in June. The decline in the headline annual rate can be attributed almost entirely to falling gas and electricity prices which had been the main source of the cost-of-living crisis that has developed over the last two years. The energy index fell -9.5% MoM last month which caused the annual rate to turn sharply negative at -7.8% YoY in July (down from 3.2% YoY in June). Normally, elevated food costs would offset the decline in energy, but in the last few months, inflationary pressure from food has eased. Food price growth was just 0.2% MoM increase, and YoY food inflation fell to the lowest point since the beginning of the year at 13.2% YoY. These trends in the volatile categories has led CPI inflation to the lowest since February 2022.
A different story is told by core CPI inflation. YoY core CPI growth was 6.9% YoY in July, unchanged from 6.9% YoY in June. This is near its high of 7.1% YoY and about half a percentage point to a percentage point higher than the range in 2022. The services index continues to keep core inflation sticky. Services inflation was 7.4% YoY, up slightly from 7.2% YoY previously. In July, hotels and air travel were the largest upward contributors. Travel & transport services inflation jumped to 10.6% YoY, a new peak, and the index tracking package holidays and accommodation services was 12.1% YoY. On the core side, durable goods prices are the main source of disinflation at -1.3% MoM and the annual rate falling -0.9 ppts to 3.9% YoY, the lowest of the notable goods type aggregates.
A similar story is told by the PPI report released today. Oil and petroleum inputs caused both input and output PPI growth to fall deeper into negative territory. Input prices were down -0.4% MoM and -3.3% YoY, and output prices were up slightly by 0.1% MoM but down -0.8% YoY. Notably, the annual inflation rate of the output PPI was negative for the first time since December 2020. This is the twelfth consecutive month that the annual inflation rate has slowed. However, the cause of that decline can be traced back to the sharp -40.0% YoY decline in petroleum product output prices.
The substantial decline in headline CPI inflation is a strong positive for UK consumers. Out of all the developed economies, UK households have felt the most hard done by inflation due to the sharp energy shock. That shock does seem to be over for the most part. Outside of the easing there, inflation has not abated with the exception of the durable goods category. Services inflation is the main talking point and is the main reason for sticky core CPI inflation due to the concentration of consumer demand in the services sector. Despite higher costs, consumers are not giving up on travel plans which suggests a lot about the strength of household financial conditions despite higher interest rates.
The Bank of England has largely expected services inflation to maintain its pace, saying in the most recent Monetary Policy Report that “services CPI inflation was projected to remain broadly unchanged in the near term.” However, any ticks upward will likely be met with similar upticks in the BoE’s hawkish rhetoric. The new near term peak in wage growth (up 7.8% YoY in Q2 2023, the highest since 2001) is also something that BoE members will consider in assessing the stickiness of services inflation. With that being said, if they decide that core CPI is the problem that needs to be solves, another rate hike is likely coming in the next meeting in September.
From Econ Mornings