U.K. Inflation Ticks Higher in September -RELAX

Inflation in the United Kingdom moved higher in September with the month-on-month CPIH headline rising by 0.5% after rising by 0.4% in August and falling by 0.1% in July. The core CPI, which is a measure excluding energy, food, alcohol beverages, and tobacco, rose by 0.4% in September after being flat in August and logging a 0.5% gain in July. The monthly trends of these inflation metrics are not particularly impressive; however, longer trends are more reassuring.

Headline inflation rises by 6.4% over 12 months, at a 4.4% pace over six months and at a 3.4% annual rate over three months. For the core CPI, the 12-month gain is 5.9%, moving higher to 6% over six months and then decelerating to 3.6% at an annual rate over three months. The 5.9% increase in the core-CPIH year-over-year is the same as it was in August. This pair of monthly observations shows the slowest increase in year-over-year inflation since March of this year. Similarly, the headline has become more disciplined even as the year/year pace rose to 6.4% from 6.3% in August. But this is the same as the 6.4% in July and prior to that inflation was running at a pace of greater than 7%, greater than 8%, and greater than 9%! Apart from this recent monthly stretch, inflation was last below 7% in March 2022. Even with the slight backtracking in the headline rate and the flat year/year result in the core, the trends for inflation progress in the U.K. remain in place.

Diffusion that looks at the propensity of inflation to pick up on a period-to-period basis shows mild readings for month-to-month data from July through September. September diffusion is at 54.5%, it was as low as 36.4% in August, and it was at 54.5% in July as well. The neutral reading for inflation is 50%. And the reading of 50% inflation is accelerating in as many categories as is decelerating period-to-period. A reading slightly above 50% indicates a slight tendency for inflation to accelerate across categories. These diffusion results are broadly in the zone of neutrality; in the case of August, there is a clear signal that inflation decelerated broadly.

Applied to the sequential data where we look at three-month inflation compared to six-month inflation, and six-month inflation compared to 12-month inflation, and 12-month inflation compared to a-year-ago inflation, we find diffusion measures at 36.4% over three months, at 45.5% over six months, and at 36.4% over 12 months. All of which indicate that inflation is slowing down period-to-period across categories. This means that inflation across the various CPI categories is behaving and giving the same signals as headline inflation, which is not always the case. In this case, the confluence of inflation trends, assessed in different ways, is reassuring.

U.K. inflation trends are moderating; that message is clear in the graphing of 3-month, 6-month and 12-month growth rates that show clear deescalating trends on all three horizons. Meanwhile, during the disinflation process, the unemployment rate has remained steady and had only a minor uptick. With oil prices on the move higher, this progress will up for further intense scrutiny. Global conditions are still challenging, and the U.K. inflation fight, which so far appears to be meeting with some success, may find that it is simply not all downhill from here and that further challenges may lie ahead. For now, markets seem ‘pleased’ with U.K. progress as the pound sterling exchange rate has firmed against the dollar and is in a rising trend on a real-trade weighted basis (the effective exchange rate). So far so good – but there is still a way to go to reach 2%.