uk jan 18 cpi, ppi, rpi - review
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Tuesday, 13 February 2018


Headline UK inflation data backed up the Bank of England (BoE) Monetary Policy Committee's (MPC) view that rates will need to rise “somewhat earlier and by a somewhat greater extent” this year.


The annual CPI rate came in at 3.0pct in January, above the median forecast of 2.9pct and in line with December's 3.0pct, as petrol prices rose by less than this time last year. Core CPI (which excludes energy, food, alcohol and tobacco) rose to up 2.7pct y/y, above estimates of 2.6pct and last month's 2.5pct. CPIH, the ONS's measure of inflation came in at 2.7pct y/y, the same as last month.


Factory prices have started to show some signs of a slowdown though. Annual PPI Input was up 4.7pct for January, above estimates of 4.1pct but sharply lower than the revised higher 5.4pct seen in December 2017. PPI Output prices also softened, rising by 2.8pct compared with the 3.0pct expected and the 3.3pct rate seen last month. Output core was up 2.2pct y/y, less than the 2.3pct predicted and 2.5pct prior. 


The average house price across the UK stayed relatively flat in December, according to the ONS. House Price Inflation (HPI) grew 5.2pct y/y, above forecasts of 4.9pct and last month's 5.0pct.


All told, today's data lends credence to the MPC's comments at last Thursday Inflation Report, suggesting that in order to quell persistent elevated prices, rates will have to rise more aggressively. 


"The rise in inflation in the 'underlying' services sector—i.e. exc. airfares, education and rent—to its highest rate since November 2012 supports the MPC's concerns that the labour market is starting to fuel inflation," writes Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 


However, as Tombs and other economists warn, this also comes at a time when signals are starting to show a slowing in UK activity. Survey data for January already point to a slowing economic picture, despite the impetus from the global growth. 


“The dilemma facing policymakers is that the pace of economic growth appears to have wilted at the start of 2018. PMI survey data registered the slowest growth of business activity for one-and-a-half years in January. Data from mortgage lender Halifax have also shown house prices falling for a second successive month in January while an index of consumer spending from Visa showed a 1.2 percent annual decline as shoppers struggled with the combination of high prices and sluggish wage growth," writes Christopher Williamson, Chief Business Economist at IHS Markit.


In terms of market reaction, the initial move in sterling was surprisingly muted with the pound failing to hold onto its gains, despite the elevated print. The initial spike up in cable of about 15 pips to 1.3902 was fleeting, falling quickly back to 1.3880. Gilt March futures initially sold off to 121.16 from 121.26.


Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), said after the release of the CPI data that the inflationary path over the next year is likely to be determined by how much economic growh is offset by inflationary pressures coming from commodity prices.


"Against this backdrop, it remains probable that while inflation will to continue to drift downwards, it’s likely to remain above the Bank of England’s two-percent inflation target for some time to come," Thiru said.


“We would urge the MPC to proceed with caution on raising rates, to avoid dampening business activity and wider economic growth. More must also be done to kickstart business investment, including addressing the upfront cost of doing business in the UK," he said.


Harry Daniels -- LiveSquawk News


UK Jan 18 CPI, PPI, RPI - Preview

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