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Livesquawk - UK Price Squeeze Continues Upside Grind For Now
UK Price Squeeze Continues Upside Grind For Now

     - January inflation rate surprised to the upside

     - Higher food and household goods prices led gains

     - Analysts predict subdued underlying inflation outlook

     

    By Harry Daniels

    LiveSquawk News

    @harry.daniels71

     

    17 February 2021 / 10.00 GMT

     

    London – The UK’s headline inflation rate exceeded forecasts in January, as tighter restrictions coincided with higher food bills and a rise in household goods prices.

     

    Data released by the Office for National Statistics said CPI increased to 0.7% year-on-year in January from 0.6% in December, one tenth above expectations. On the month, the index fell by 0.2% from 0.3% last month and the -0.4% predicted. Annual core CPI remained at 1.4% in January, ahead of the 1.3% expected.

     

    The ONS said the rise in furniture, household equipment (less discounting), restaurants and hotels, and food and non-alcoholic beverages was only partially offset by softer clothing and footwear prices.

     

    Market reaction was limited with the GBP/USD cross rate softer by 0.1% post data despite the headline beat.

     

    “UK inflation has swung around a bit since Covid-19 began, and January was no different. Higher restaurant/hotel prices (despite being closed) and a lower-than-usual post-Christmas drag from transport prices were among the factors that allowed CPI to drift up,” said ING’s James Smith.

     

    Smith is among economists that expect the upward trend to continue. “By April, we’ll no longer be comparing current petrol prices to pre-pandemic levels. That, and a 9% rise in the household energy price cap will lift headline CPI to the 1.5% area in the second quarter,” he noted.

     

    Factory gate prices driven by commodity prices

     

    Source: Office for National Statistics – Producer Price Index

    Producer price data for the period also revealed a sharp rise in input prices. PPI was up 1.3% in January from 0.6% in December. The ONS said this marked the second successive rise, following 10 consecutive months of negative annual inflation. On the month input prices rose 0.7%, slumping by 0.5% from last month’s 1.2%.

     

    The ONS said output prices printed -0.2% year-on-year in January, up from -0.5% in December, the highest in 11-months. The annual rate has now printed 11 successive months of negative growth. Output prices were 0.4% month-on-month, up from 0.2% previously.

     

    Petroleum products and transport equipment provided the largest upward contribution to the annual rate.

     

    Inflation rise expected to dissipate over time

     

    Economists say inflation in the UK is poised for a further increase in the coming months. Most say it is only a matter of time before the index hits the Bank of England’s two percent inflation target.

     

    Investec’s Sandra Horsfield noted that this was partly as a result of higher energy prices now compared to the spring of 2020. “On top of that, the full rate of VAT is to be restored in catering and hospitality in April, and government measures such as ‘Eat Out to Help Out’ dropping of the annual comparison will drive inflation higher still (for a while) during the summer.”

     

    However, experts say the price rise is unsustainable. “There are reasons to think it won’t. We expect headline CPI to dip below target again in 2022,” noted ING’s Smith.

     

    “Partly, this is because the expected rise to 2% is mostly down to energy - core will continue to be pretty stable. Importantly, we also don’t expect a massive spillover from the pent-up demand story.”

     

    In terms of Bank of England monetary policy, consensus among analysts is that Wednesday’s readings do little to alter the rate setting committee’s thinking. The current inflation landscape does not currently make an argument for negative rates later in the year. Nor does it warrant either rate hikes or balance sheet reduction until 2023 at the earliest.