Global Inflation Cools but U.K. Inflation Remains Stubborn...or Worse

U.S., Euro Area and U.K. inflation lose momentum, but U.K. inflation is the most stubborn U.K. inflation, on its CPIH measure, rose 0.6% in March, a disappointingly large increase after gaining 1% in February. Inflation in the U.K. is 8.9% over 12 months, decelerating to an 8.4% annual rate over 6 months and then trimming down to 7.2% annualized pace over 3 months. This is still very hot inflation. In addition, the core measure of inflation rose 0.5% in March after rising 0.9% in February. The progression of core inflation goes from 5.6% over 12 months, rising by 5.8% when annualized over 6 months and rising again to a pace of 6.1% over 3 months. This is exactly the wrong progression for the U.K.

U.K. comparative inflation Comparing U.K. inflation to inflation in the European Monetary Union and to the United States, the U.K. has currently the highest year-over-year inflation rate by a large margin. It also has the smallest decline in the year-over-year inflation rate when all are measured on an HICP basis. Year-on year inflation on an HICP basis in EMU is 6.9%, U.K. HICP inflation is at 10.1% and U.S. HICP-basis inflation is at 5.3% (the U.S. HICP is up to date though February). Year-on-year EMU inflation is lower by 0.6%, U.K. inflation is higher by 3% and U.S. inflation is lower by 3.6%. The U.K. is a clear laggard on inflation progress. The U.S. is making the most progress in this grouping.

U.K. inflation dynamics The U.K. inflation progress for the headline is poor and for the core, it’s in the wrong direction. Not surprisingly the diffusion statistics for U.K. inflation that measure inflations breadth across the components in the table also is poor. One year ago, the year-over-year inflation rate had accelerated from what it had been a year before in 90% of these categories. Currently, over 12 months, the 12-month inflation rate is still accelerating in 64% of the categories compared to what it was one year ago. Over 6 months, there's a break, as inflation accelerates in only 27% of the categories compared to the inflation rate over 12 months. But then, over 3 months, the trends are back to broad deterioration as diffusion is again at 64% comparing the 3-month inflation rates to inflation rates over 6 months. These statistics do not show that there is much progress in train in the U.K. Over 3 months, the inflation rates that are deteriorating compared to 6-months are for housing & household expenditures, furniture outlets, transportation (reflecting the oil price weakness), and for restaurants & hotels (where, despite decelerating, the 3-month inflation rate is still 10.7% annualized).

U.K. economy: In terms of the performance, there has been a slight tendency for the unemployment rate to increase. In January, the unemployment rate is up to 3.8%; six months prior to that it had been as low as 3.5%. The unemployment rate in the U.K. has crept higher, but it doesn't show strong signs of accelerating.

On balance: The Bank of England still has work to do. In fact, its situation is somewhat worrisome because of the acceleration that we see in core inflation. Global trends (that we will look at below) are moving in the right direction; they will provide a better environment for inflation fighting ahead. They can provide some assistance in gaining control of inflation. But the current situation in the U.K. is that (1) inflation is too high, (2) it's stubborn, or in terms of the core measure, (3) it's simply moving in the wrong direction and (4) still too high. The main burden for success falls on the BOE.

The global scene... Globally inflation pressures are dissipating. Many are becoming more optimistic on inflation because there is a global inflation slowdown. In addition, monetary fundamentals are turning more positive. Money supplies are slowing broadly, industrial output is slowing globally, and commodity prices are slowing. There is a true basis for inflation optimism. But…how much? Wage growth remains elevated. OPEC-plus is pushing back by cutting output to try to support oil prices against this tide of slowing. The war in Ukraine remains a risk factor along with deteriorated global geopolitics and ramped up production to support armaments for the combatants.