U.K. Inflation Flares: Accelerates- Headline, Core; Stick a Fork in the BOE the Rate Cuts Are Done

Inflation in the United Kingdom, as measured by the CPIH, rose by 0.4% in August as well as for the measure excluding energy, food, alcohol, and tobacco that rose by 0.5%. The recent sequence of monthly inflation rates is not hospitable or kind to the notion of the Bank of England doing any further rate cuts anytime soon.

Sequential inflation readings show the headline CPI measure up 3.1% over 12 months and at a 2.9% annual rate over six months. It further accelerates to a 4% pace over three months. The expanded core excluding energy, food, alcohol, and tobacco is up by 4.4% over 12 months, up at a 5.1% annual rate over six months and continues to rise at a 5% annual rate over three months. Both series are at some point about a tick or so short of being persistently accelerating measures. However, putting technicalities aside, inflation clearly is accelerating in the U.K. and both measures embrace generally accelerating trends. The year-over-year headline pace of 3.1% is too fast; the core rate of 4.4% is way too fast. The three-month growth rates that have the headline at 4% and the expanded core 5% are far too fast.

Applying the diffusion concept to 12-month inflation compared to a year ago, inflation does decelerate on that time horizon with a diffusion value only at 18%. Diffusion above 50% means inflation is accelerating in more places than it is decelerating. Below 50% diffusion flags inflation that is more broadly decelerating. The 12-month reading flags a sharp broad slowing for inflation. Of course, the 12-month headline inflation rate is 3.1% and a year ago it was running at twice that pace of 6.3% so finding general broad deceleration is not too surprising. The next step is a comparison of six-month inflation to 12-month inflation. Here we see diffusion up to 63.6%. So, inflation is accelerating in more categories than it's decelerating over six months compared to 12 months, not a good development. Over three months, however, headline inflation accelerates to 4% while the core is more or less unchanged at around the 5% mark, but diffusion falls back to 36.4% indicating that inflation is only accelerating at about one-third of the categories over three months. So that's a better development.

On a month-to-month basis, diffusions in August and July are both above 50%; but diffusion in June fell a little short of that with a diffusion gauge at 45.5%. Recent months seem to show some inflation pressures on balance.

The U.K. claimant rate of unemployment is up to date through August, and it shows that the unemployment rate continues to creep up from 4.4% in June to 4.6% in July to 4.7% in August. Inflation is accelerating and the unemployment rate is rising, putting the Bank of England in a difficult spot. Clearly the economy is calling out for some kind of stimulus, but the inflation rate is telling the Bank of England ‘don't you dare.’ That's a stronger version of the problem that the U.S. faces where inflation is excessive, but it has declined modestly in recent months as the unemployment rate has crept up even though it's still at a level that would appear to signal full employment in the U.S. Still, monetary policymaking globally is getting more difficult, and the needs are less clear cut than they were.

Central banks clearly are confronted with the dilemma of an inflation rate that is still stubbornly too high. In the case of the Bank of England, it's not only too high but it's accelerating and accelerating broadly and that is going to create problems for making policy in the United Kingdom. Inflation continues to percolate in the European Monetary Union although some recent data have suggested a sharp weakening in the German economy. We will have to wait and see how much of that is emblematic of the rest of the euro area. In any event, Europe and the U.K. could get some help because the U.S. seems willing to cut rates today. As the U.S. reduces rates, it will take some interest rate pressure off global economies whether their central banks cut rates immediately or not.