U.K. Inflation Cools in March but Not by Enough

When the Music Stopped, or at Least the Inflation Progress... U.K. inflation on the HICP measure eased to 0.4% in March from 0.5% in February. The month-to-month CPIH measure also rose by 0.4% from 0.5% in February. The CPIH excluding food, energy, alcohol, and tobacco rose by 0.4%, the same as in February. The Bank of England looks at several inflation gauges; it targets HICP, which rose 3.2% year-over-year in March and slowed slightly from its year-over-year pace of 3.4% a month ago. The HICP steps inflation down to 2.7% over six months but then inflation rises at a 3.9% annual rate over three months, not what the Bank of England was looking or hoping for. The CPIH is 3.7% year-over-year, down to 3.3% at an annual rate over six months and up to an even worse 4.4% over three months. The core CPIH that excludes food, energy, alcohol, and tobacco, pretty much all things necessary or fun in life, rose by 4.7% over 12 months, cooled to 3.7% over six months, but then ticked up to 3.8% at an annual rate over three months.

Inflation makes progress, but not reliably enough The bottom line is that inflation, as represented by either six-month or three-month inflation rates, is generally lower than it was over 12 months ago, indicating ongoing progress on the inflation front. However, the progress isn't as substantial as the Bank of England would like to see; there's some backtracking over three months compared to six months that's not what monetary policy is looking for to gain confidence that inflation will continue to fall toward target.

Diffusion results are mixed Sequential diffusion- Diffusion calculations applied to the categories in the table showed an inflation over 12 months that exhibits diffusion of 23% compared to inflation rates of 12-months ago. The diffusion measure is the percentage of categories where inflation is accelerating period-to-period. Over six months, diffusion falls to 7.7%. HICP inflation on that comparison fell to 2.7% from 3.2%. The diffusion calculation comes from comparing the inflation rate in each category over six months to the same category over 12 months. If the inflation rate is higher over six months than over 12 months, we count it as acceleration. Acceleration was quite rare over six months, occurring only for housing and household expenditures. However, over three months with the HICP rising to 3.9% compared to 2.7% over six months, diffusion jumped from 7.7% to 61.5%. Being above 50% is critical because it means inflation is accelerating in more categories than it is decelerating and that tends to add more authenticity to the acceleration of inflation over three months. It tells us that the acceleration was not just because of a few rogue categories or several large increases in categories that had a high weight, but rather it's something that's broad-based.

Monthly diffusion- Monthly data are more lenient on the diffusion front. In March diffusion is only 38.5% with the month-to-month gain of 0.4%, below a 0.5% rise in February. Inflation is accelerating in March in only 38.5% of the categories. However, in February inflation rose 0.5% compared to 0.1% in January and inflation accelerated in 61.5% of the categories, clearly over half of them. In January with that low inflation print of 0.1%, inflation accelerated in only 30.8% of the categories. Over the last three months, the diffusion data were quite good for two months and moderately bad for one of them. However, when we go back to the table to look at the three-month changes compared to six-month changes, the BOE has that high 61.5% diffusion number staring us in the face.

Some impact on the unemployment rate from rate-hiking The unemployment rate in the U.K. has begun to tick up; it's up to 4.2% (in January). Three months before that the unemployment rate had been at 3.9%, and three months before that it had been at 4.2%. There are hints here of the unemployment rate moving up, but for now it's only up from its low and it hasn't made any kind of a new cycle high. It does not appear that there would be much in the way of political pressure from rising unemployment on the Bank of England just yet. But the U.K. economy has been struggling and clearly there's a strong constituency for getting interest rates lower and lighting a fire under economic growth. The poor progress on inflation this month is going to make that difficult to do without seeing more inflation progress. For now, the Bank of England seems to be running into the same sort of problem that the Federal Reserve has run into and that is that there has been some very sharp inflation progress, but it has since run into a snag and now monetary policy may be stuck playing a waiting game starring the economic reality.