Headline and core CPI fall more than forecast  

ONS change to weighting helped cap rise 

Factory gate prices show signs of softening 

Labour market remained tight at end of 2022 

Inflation still outpaces pay growth  

By Harry Daniels  

LiveSquawk News  

@HarryDaniels71  

15 February 2023 | 11:30 GMT  

LONDON – Britain’s headline rate of inflation eased more than expected last month, with analysts pointing to the change in weightings for the consumer price basket as at least part of the reason for slowdown. Nonetheless, consumer price growth remained stubbornly high.  

Annual inflation rose 10.1% in January, which was short of the 10.3% estimate and December’s 10.5% rate. On the month, CPI decreased 0.6%, two-tenths below consensus of a 0.4% fall and significantly lower than the 0.4% rise in the previous month.  The annual core rate also eased unexpectedly to 5.8% versus the 6.2% forecast and 6.3% at year’s end.   

Breaking down this month’s report, ONS chief economist Grant Fitzner said, “Although still at a high level, inflation eased again in January. This was driven by the price of air and coach travel dropping back after last month’s steep rise. Petrol prices continue to fall and there was a dip in restaurant, café, and takeaway prices. The cost of furniture decreased by more than this time last year, in line with traditional New Year discounting.  

“These were offset by rising prices for alcohol and tobacco, following on from seasonal price cuts in December and a more subdued rise at the same time last year.” 

Food inflation remained elevated over the period, up 16.8% and only a tenth lower than December.  

Elizabeth Martins, senior economist at HSBC explained that part of the drop in the headline rate reflects weighting changes. “The post-pandemic period has been marked by more spending on services and less on goods. With services inflation lower than goods inflation and in this release at least, falling faster, increasing its weighting has brought down the overall headline and core rates.” 

Compared to fellow G7 nations, annual UK price growth was only lower than in Italy, but all countries appear to have hit respective peaks for now. 

The ONS reported on pipeline inflation for the first time in three months following issues with calculations, and the picture was encouraging.  

In the year to January, PPI input prices grew 14.1%%, lower than predictions of 14.7% and 16.2% in the previous period. On the month, prices fell sharply, down 0.1% from a 1.1% prior and a 0.2% median estimate. 

Annual PPI output prices in January rose 13.5% above the 13.3% forecast but below December’s 14.6% print. Output prices increased 0.5% on the month, four-tenths above the 0.1% estimate and higher than -0.8% previously. 

“There are further indications that costs facing businesses are rising more slowly, driven by falls in crude oil, electricity and petroleum prices,” ONS’s Fitzner said. “However, business prices remain high overall, particularly for steel and food products.”  

Ben Laidler, global markets strategist at eToro, noted: “UK inflation has fallen for a third consecutive time, but it remains a frustratingly slow-paced decline. Price rises are still in double-digits and are the highest amongst major economies globally. 

"However, it’s a step in the right direction with the BoE forecasting a fast inflation fall from mid-year, to around 4% by the end of 2023, as lower natural gas prices are felt in the broader economy and the jobs market eases.” 

It should be noted that before the Monetary Policy Committee meets again, it will have a whole month's worth of new data (including the labour market on the 14th and inflation on the 22nd) to work with. HSBC’s Martins said the bank emphasised its data dependency, so those new pieces of information will be crucial. “Inflation remains way higher than normal, and way higher than wage growth (5.9% in December). But this does feel like, finally, something to celebrate.” 

On Tuesday, the UK reported on the state of the labour market, adding a layer of complexity to the bank’s objectives.

Payroll jobs provisionally increased by 102,000 in January following an upwardly revised 48,000 rise previously. In the three months to December, the unemployment rate stood at 3.7%, unchanged versus forecasts and the previous reading. 

Growth in average total pay (including bonuses) was 5.9%, this missed the 6.2% predicted but was below last month’s 6.4% read. Regular pay was up 6.7%, a mark higher than the forecast of 6.5%, and last month’s 6.4%.

Statisticians reported that average regular pay growth for the private sector was 7.3% from October to December, and 4.2% for the public sector; outside of the height of the coronavirus pandemic period, this is the largest growth rate seen for the private sector.

In the three months to January, vacancies fell by 76,000 on the quarter to 1.134 mln, the seventh consecutive quarterly fall since the May to July period last year.

Pollsters noted that ongoing strike action also influenced the figures with 843k days lost to industrial action, the highest since November 2011. ONS director of economic statistics Darren Morgan said, “The number of working days lost to strikes rose again sharply in December. Transport and communications remained the most heavily affected area, but this month there was also a large contribution from the health sector.”

Morgan Stanley’s Bruna Skarica said, “While headline numbers suggest a hawkish Q422 labour market release, the print was far more mixed than that: supply has bounced back more meaningfully at the end of the year, and while headline regular pay growth was a beat, it was helped by revisions - with the monthly pace of private sector wage gains slowing in December.”