LONDON – A day ahead of the Bank of England rate decision, February’s headline rate of inflation threw policymakers a curveball as prices rise across the board.
Annual inflation rose 10.4% in February, half a percentage point above the 9.9% estimate and January’s 10.1% rate. On the month, CPI decreased 1.1%, well ahead of consensus of a 0.6% gain and significantly higher than the -0.6% fall the previous month. The annual core rate also spiked unexpectedly to 6.2% versus the 5.7% predicted and 5.8% last.
Explaining the surge in prices, ONS chief economist Grant Fitzner said, “Inflation ticked up in February mainly driven by rising alcohol prices in pubs and restaurants following discounting in January.
“These were partially offset by falls in the cost of motor fuel, where the annual inflation rate has eased for seven consecutive months.” There was also some downside pressure from recreation and culture.
Food inflation continues to weigh heavy on household budgets and was elevated again in the last month’s numbers. As a sector, food and non-alcoholic beverage inflation rose to its highest rate since 1977 at 18.2% y/y.
Factory gate prices
In the year to February, PPI input prices grew 12.7%, higher than the 12.0% estimate but softer than January’s upwardly revised 14.7%.
On the month, prices fell 0.1%, half a percentage down from last month’s revised higher 0.4%.
Annual PPI output prices in February rose 12.1% above the 12.4% forecast but below February’s 13.5% print. Output prices fell 0.3% on the month, reversing last month’s 0.5% and below the 0.2% consensus.
The ONS said that inputs of crude oil and petroleum products provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively. “The annual rate of the input Producer Price Index (PPI) has now been positive for 27 consecutive months, although it has been slowing for the last eight months.
“The annual rate of the output PPI has now been positive for 26 consecutive months, but it has been slowing for the last seven months.”
Where to from here?
Despite the worrying prospect of a return to higher prices, some experts do not see this report as a new trend. Martin Beck, chief economic advisor to the EY ITEM Club posited that there is still good reason to think that inflation will fall substantially this year and that February's pickup will prove to be a one-off. Namely on the back of recent falls in energy prices.
“The EY ITEM Club thinks the Energy Price Cap is likely to fall to around GBP2,100 from July, which would contribute to a large decline in the energy component of CPI inflation, from 3.2ppts to -0.4ppts in Q4 2023. This, together with the strong base effects that are likely to come into play for most major inflation components, should put downward pressure on headline inflation.
The forecasting group expects the CPI measure to fall to around 3% by the end of the year.
MPC doves dealt a blow
For JP Morgan’s Allan Monk, Thursday’s BoE decision had looked close owing to recent market stress and some weakening in the nominal data of late, but not anymore. “The MPC is likely to hike 25bps, but also retain the optionality to do more subject to further data surprises.”
Elizabeth Martins, senior economist at HSBC wrote that with the risk of a decision to hold rates now looking smaller, the big question for tomorrow is about the guidance: “will the BoE signal a continuation of the current stance, a conditional pause (i.e. a continued hawkish bias) or something more neutral considering the recent financial market turmoil?”
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- Headline inflation rate rebounds sharply in February
- Core prices deliver significant surprise
- Increases in hospitality partially offset by falling fuel costs
- Investors now more certain of BoE hike on Thursday
By Harry Daniels
LiveSquawk News
@HarryDaniels71
22 March 2023 | 11:30 GMT
LONDON – A day ahead of the Bank of England rate decision, February’s headline rate of inflation threw policymakers a curveball as prices rise across the board.
Annual inflation rose 10.4% in February, half a percentage point above the 9.9% estimate and January’s 10.1% rate. On the month, CPI decreased 1.1%, well ahead of consensus of a 0.6% gain and significantly higher than the -0.6% fall the previous month. The annual core rate also spiked unexpectedly to 6.2% versus the 5.7% predicted and 5.8% last.
Explaining the surge in prices, ONS chief economist Grant Fitzner said, “Inflation ticked up in February mainly driven by rising alcohol prices in pubs and restaurants following discounting in January.
“These were partially offset by falls in the cost of motor fuel, where the annual inflation rate has eased for seven consecutive months.” There was also some downside pressure from recreation and culture.
Food inflation continues to weigh heavy on household budgets and was elevated again in the last month’s numbers. As a sector, food and non-alcoholic beverage inflation rose to its highest rate since 1977 at 18.2% y/y.
In the year to February, PPI input prices grew 12.7%, higher than the 12.0% estimate but softer than January’s upwardly revised 14.7%.
On the month, prices fell 0.1%, half a percentage down from last month’s revised higher 0.4%.
Annual PPI output prices in February rose 12.1% above the 12.4% forecast but below February’s 13.5% print. Output prices fell 0.3% on the month, reversing last month’s 0.5% and below the 0.2% consensus.
The ONS said that inputs of crude oil and petroleum products provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively. “The annual rate of the input Producer Price Index (PPI) has now been positive for 27 consecutive months, although it has been slowing for the last eight months.
“The annual rate of the output PPI has now been positive for 26 consecutive months, but it has been slowing for the last seven months.”
Despite the worrying prospect of a return to higher prices, some experts do not see this report as a new trend. Martin Beck, chief economic advisor to the EY ITEM Club posited that there is still good reason to think that inflation will fall substantially this year and that February's pickup will prove to be a one-off. Namely on the back of recent falls in energy prices.
“The EY ITEM Club thinks the Energy Price Cap is likely to fall to around GBP2,100 from July, which would contribute to a large decline in the energy component of CPI inflation, from 3.2ppts to -0.4ppts in Q4 2023. This, together with the strong base effects that are likely to come into play for most major inflation components, should put downward pressure on headline inflation.
The forecasting group expects the CPI measure to fall to around 3% by the end of the year.
For JP Morgan’s Allan Monk, Thursday’s BoE decision had looked close owing to recent market stress and some weakening in the nominal data of late, but not anymore. “The MPC is likely to hike 25bps, but also retain the optionality to do more subject to further data surprises.”
Elizabeth Martins, senior economist at HSBC wrote that with the risk of a decision to hold rates now looking smaller, the big question for tomorrow is about the guidance: “will the BoE signal a continuation of the current stance, a conditional pause (i.e. a continued hawkish bias) or something more neutral considering the recent financial market turmoil?”