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Livesquawk - Markets Lift Inflation Outlook With UK CPI At Highest Mark In Nearly 3 Years
Markets Lift Inflation Outlook With UK CPI At Highest Mark In Nearly 3 Years

- June consumer price jump surprises markets

- Cost pressures broad-based and persistent

- Factory gate inflation slowing

- Experts say BoE rate hikes to begin in May 2022


By Harry Daniels 

LiveSquawk News 




14 July 2021|11.30 GMT 


London – The UK’s annual measure of inflation once again outpaced predictions by rising for the fourth consecutive month in June.


Headline inflation rose to 2.5% in June, well above the market consensus of 2.2% and last month’s 2.1%. The annual core reading of 2.3% also beat estimates of 2.0%, which was also the mark in May. On the month, CPI was down by a tenth from last month’s 0.5% but ahead of the 0.2% forecast.


The Office for National Statistics said the rise was widespread, with upward contributions from food, second-hand cars, clothing and footwear, out-of-home eating and drinking, and petrol. The majority of these goods suffered declines last year. 


Partially offsetting the gains were games, toys and hobbies, where prices fell this year but rose a year ago during the throes of the pandemic and stay-at-home orders.


HSBC’s Chris Hare said, “Today's significant upside inflation surprise is the second in as many months. Indeed, for headline CPI, the 0.4 percentage points of upside news in June follows a 0.3 percentage points surprise in May. In other words, of the 1.0 percentage points increase in inflation over the past two months, 0.7 percentage points has come as a surprise. Moreover, virtually all that upside news has been driven by core inflation.”


Factory gate prices

Annual PPI output prices were a little more subdued, rising 4.3% versus the 4.8% expected and down from a revised 4.7% in May. On the month, output prices rose 0.4% from 0.5% previously. PPI input prices increased 9.1% year-on-year to miss the 11.0% estimate and come in below last month’s 10.7% read. In the month to June, inputs prices slipped into negative territory, down 0.1% from an expected 1.1% rise.


The ONS report highlighted the transport equipment sector, and noted that metals and non-metallic minerals provided the largest upward contributions to the annual rates of output and input inflation respectively.


Market reaction saw the UK 10-year benchmark gilt yield jump roughly 3 basis points immediately after the release.


Are prices still transitory?

BofA’s Robert Wood said, “Strong goods price inflation reflects supply chain pressures but also a large margin expansion in our view. That should correct eventually. Meanwhile cyclical and services inflation remain contained [which] suggests still limited underlying inflation pressure. Accordingly, we expect inflation to drop back next year.”


This was a view backed by arguments from HSBC’s Hare. “We put some weight on the 'temporary' story – some of the supply-demand imbalances revealed in retail and hospitality should unwind, we think, as the economy continues to reopen. But we also put some weight on the 'persistent' story – that's why we think UK CPI inflation will run a touch above the Bank of England's 2% target next year. And that expectation is at the crux of our view that the MPC will raise the bank rate by 15bps next May and by 25bps next November, bringing end-22 bank rate to 0.50%.”