UK inflation expected to tick up, complicating talk of Bank of England pause
AN EXPECTED increase in UK inflation is making the Bank of England’s (BOE) already difficult decision on when to pause rate hikes even harder.
UK inflation data due to be released on Wednesday (Sep 20) will likely show that price gains notched higher to 7 per cent last month from 6.8 per cent in July, according to the median of more than 30 estimates in a Bloomberg survey. It would mark the first acceleration since February, with economists attributing the movement to fuel price fluctuations.
While some downturn in inflation had been anticipated by the BOE, it would make for a complicated backdrop when policymakers meet the next day to decide whether to raise rates for what could be the last time of the cycle.
All but one of the more than 50 economists surveyed by Bloomberg believe the bank will increase the key rate by 25 basis points on Thursday to 5.5 per cent, a view overwhelmingly endorsed by financial markets.
Speculation that the bank might pause after its next increase has intensified after dovish comments by Governor Andrew Bailey and BOE chief economist Huw Pill – and the European Central Bank’s own efforts to change course.
Traders have pared back bets on subsequent BOE increases, pricing in a 60 per cent chance of an additional hike by February.
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The UK’s economic outlook has darkened since June, bolstering arguments that 14 consecutive rate hikes are beginning to take their toll on output.
The risk of continued price increases while the broader economy stalls has stoked concerns that Britain, along with Europe, is headed towards a period of “stagflation”.
“The signals are telling us they’re not sure whether they want to hike more,” Nouriel Roubini, chairman and chief executive officer at Roubini Macro Associates, told Bloomberg Television on Monday. “If that happens, there could be a de-anchoring of inflation expectations. You could have a true stagflation.”
That spells trouble for Prime Minister Rishi Sunak, who has pledged to both cut inflation and increase growth ahead of a general election expected to be held in the autumn of next year.
Sunak is preparing to outline his policy plans to reverse Labour’s double-digit lead in the polls at the Conservative Party’s annual conference next month in Manchester.
The inflation data and rate decision are part of a barrage of economic announcements in the coming days that will shape investors’ decisions for weeks to come. Indicators will also show whether British companies and consumers are continuing to pull back after surprise contractions in data released last month.
While no one data point is likely to dominate BOE decision-making, the consumer price index (CPI) continues to loom largest, with prices rising more than three times faster than the Treasury’s 2 per cent target.
The recent jump in fuel prices has fed concerns that the key driver of global inflation last year could be set to return.
Petrol and diesel prices on average climbed by around 4 per cent in August from July, compared with a drop of around 6.5 per cent in the same period a year earlier. All things being equal, that would account for all of the upward movements in inflation.
Bailey played down concerns about fuel prices when giving evidence to lawmakers earlier this month, noting how headline inflation has been coming down.
Policymakers have instead focused on CPI components such as core and services inflation for signs of whether price increases are becoming embedded in the British economy.
Core inflation, which excludes more volatile items such as energy and food, has proved stickier than BOE officials hoped. That measure is expected to ratchet down 0.1 percentage points to 6.8 per cent, according to Bloomberg’s survey.
Equally in the spotlight will be services inflation, which has outstripped the headline number as wage increases drive up the cost of providing everything from insurance to consulting.
The gauge rose to 7.4 per cent in July, compared with 7.2 per cent a month earlier, underscoring concerns about a wage-price spiral.
Overshooting the BOE’s forecasts for a 7.1 per cent rise in August “would probably go a long way to countering” other positive data points, said Andrew Goodwin, chief UK economist for Oxford Economics.
Services inflation data may also help clarify mixed labour market signals, with wages rising at a record pace even as unemployment ticked up.
Retail sales and purchasing managers’ index (PMI) data are also expected to show on Friday that inflation and higher rates are weighing on economic activity.
Retail sales excluding automotive fuel are forecast to edge up 0.7 per cent in August after a disappointing July, based on estimates compiled by Bloomberg.
S&P Global Ratings’ Composite PMI, which surveys the manufacturing and services sector, is also expected to remain in contraction.
Wednesday’s data will also have knock-on effects for the public finances, as around a quarter of the UK’s national debt is linked to inflation.
Figures on Thursday will show whether July’s fall in the debt-interest payments due was sustained for a second month – especially as Chancellor of the Exchequer Jeremy Hunt seeks budget headroom for expenses in his autumn fiscal statement.
“The Conservatives may have to be, well, conservative, in what they do pre-election,” said Liz Martins, senior economist at HSBC Bank.
“Moves in inflation and rates since the March 2023 Budget could add £21 billion (S$35.5 billion) to borrowing this year, even if we assume a reduction in the cash requirement on the back of the lower-than-expected borrowing year to date.” BLOOMBERG
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