UK Inflation Problem Deepens

As at 21 June 2023

Inflation in the United Kingdom has come in above expectations for the last four consecutive months. Most recently, the May Consumer Price Index (CPI) was up by 8.7% Year-on-Year (YoY), and the core CPI (which excludes food and energy prices) hit a 30-year high of 7.1% (YoY). Although energy prices have continued to decline and food-price inflation has slowed, services price inflation has continued to strengthen. This comes after several economic releases showing stronger-than-expected economic activity and an increasingly tight labour market, with the latest wage growth data also surprising markedly to the upside.

UK Underlying Inflation Estimate¹

Source: Fulcrum Asset Management

Our internal modelling is consistent with the widespread pessimism around the UK inflation situation. Using a technique based off Stock and Watson (2016)², which applies a statistical filter to CPI sub-component DATA, we estimate the underlying inflation rate in the UK. This method has been shown to effectively capture the persistence of inflation over a long period of time, making it informative about the future inflation outlook. By this measure, underlying inflation has strengthened to 7.9% Year-on-Year Annualised (YoY, Ann.) compared to 7.0% (YoY, Ann.) before the May release. Meanwhile, the equivalent estimate for the Euro Area is 3.9% (YoY, Ann.) and for the US it is 4.3% (YoY, Ann.). 

Going forward, the recent data will pressure the Bank of England (BoE) to continue with monetary tightening. Concerningly for the BoE, the recent inflationary pressure has come at a time when commodity markets have largely become a source of dis-inflation, indicating that much of the inflation problem can be linked to the domestic economy rather than global or geopolitical factors. Investors in the UK and indeed around the world will be watching to see how the BoE manages what seems to be a uniquely acute inflation problem among developed economies.

  1. Actual refers to the Seasonally-Adjusted Month-on-Month Annualised change in the CPI, CB Target refers to the Central Bank’s 2% inflation target and Trend M-UCSVT refers to Multivariate-Unobserved Component Stochastic Volatility Trend.
  2. Stock, James H., and Mark W. Watson. “Core inflation and trend inflation.” Review of Economics and Statistics 98.4 (2016): 770-784.

This content is provided for informational purposes and is directed at professional as defined in Directive 2011/61/EU (AIFMD) and Directive 2014/65/EU (MiFID II) Annex II Section I or Section II or an investor with an equivalent status as defined by your local jurisdiction. Fulcrum Asset Management LLP (“Fulcrum”) does not produce independent Investment Research and any content disseminated is not prepared in accordance with legal requirements designed to promote the independence of investment research and as such should be deemed as marketing communications.  This document is also considered to be a minor non-monetary (‘MNMB’) benefit under Directive 2014/65/EU on Markets in Financial Instruments Directive (‘MiFID II’) which transposed into UK domestic law under the Financial Services and Markets Act 2000 (as amended). Fulcrum defines MNMBs as documentation relating to a financial instrument or an investment service which is generic in nature and may be simultaneously made available to any investment firm wishing to receive it or to the general public. The following information may have been disseminated in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service provided by Fulcrum.Any views and opinions expressed are for informational and/or similarly educational purposes only and are a reflection of the author’s best judgment, based upon information available at the time obtained from sources believed to be reliable and providing information in good faith, but no responsibility is accepted for any errors or omissions. Charts and graphs provided herein are for illustrative purposes only. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Some of the statements may be forward-looking statements or statements of future expectations based on the currently available information. Accordingly, such statements are subject to risks and uncertainties. For example, factors such as the development of macroeconomic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements. In no case whatsoever will Fulcrum be liable to anyone for any decision made or action taken in conjunction with the information and/or statements in this press release or for any related damages.  Reproduction of this material in whole or in part is strictly prohibited without prior written permission of Fulcrum Copyright © Fulcrum Asset Management LLP 2024. All rights reserved.

FC212 210623

Share this article

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email
Your privacy

Cookies are data files that are stored on your computer or other smart device by a website’s server. Each cookie is unique to your web browser. It will contain some anonymous information such as a unique identifier, website’s domain name, and some digits and numbers. Cookies are useful as they allow us to recognise a user’s device and its preferences in order to ensure that our website works properly. By continuing to use this website, you consent to the use of our cookies.


You can find out the different types of cookies used on our website in our Cookies and Data Privacy Policies.

Necessary cookies