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.