U.K. CPIH Flares...But Slows

Inflation in the U.K. continues to run hot in February. The headline gauge CPIH rose 0.5% in February, the same as in January and in December. Sequential inflation rates for the U.K. show a 5.5% annual rate over 12 months, a 6.5% annual rate over six months, and a 6.2% annual rate over three months. Inflation shows signs of having peaked. These are early signs, preliminary, tentative signs, not irreversible, but encouraging.

Core Inflation- a more complicated pattern The core measure, which is the CPIH excluding energy, food, alcohol beverages & tobacco, decelerated in February rising by 0.4% after gaining 0.6% in January and 0.3% in December. This core measure is up at a 4.5% pace over 12 months; it accelerates to 5.2% over six months; it edges higher to a 5.4% pace over three months. However, a plot of the three-month inflation rates for the core shows that inflation ticked off its highest pace of this cycle slowing in February compared to January (5.8% in January). However, that's only a one-month to deceleration, certainly not definitive.

Inflation fighting complications from the virus ...again The Bank of England has begun to move to fight inflation. Like other central banks, it's concerned that inflation is high and has spread. However, the U.K., like much of Europe right now, is undergoing a resurgence of the virus. This new variant is very highly transmissible; it strikes Europe when countries in Europe are taking off their restraints. WHO claims that the constraints are being taken off too rapidly; it even uses the word ‘brutally’ to describe the policy of relaxation. Still, it's hard to tell why the spread has picked up. Restrictions were lifted and the new variant is much more transmissible-so what is responsible? A number of European countries, especially Germany, right now are undergoing sharp increases in their infection rates. This may be something that monetary policy is going to have to take account of even in the face of other challenges.

Breadth of inflation and its rise monthly Among the 10 U.K. CPI categories in February, half of them show acceleration in inflation month-to-month compared to January. In January, five categories out of ten also had showed month-to-month acceleration. The proportion of acceleration in January and February was lower than in December when seven categories showed acceleration month-to-month. However, with five categories accelerating out of 10 monthly, the breadth of inflation is meeting some resistance to spreading.

Sequential trends Turning to sequential growth rates, over three months only five categories show acceleration compared to six over six months. Over 12 months nine categories accelerated compared to 12-months ago. Over six months the breadth is still substantial with only a few categories resisting acceleration. It is not surprisingly that the 12-month inflation rate is substantially and widely higher across all commodity categories compared to 12-months ago. But over three months the mix of accelerating and decelerating is at the point of neutrality: five accelerate and five decelerate.

The outlook The challenge for the future is going to involve dealing with this inflation spike, with higher global commodity prices, with rising oil prices, with the distortions caused by the war in Ukraine, with various sanctions NATO members and others have adopted, with ongoing problems from the virus, and with supply chain issues. The challenges really are many. For the time being, there is some good news with the three-month inflation rate edging down to 6.2% and the three-month core inflation rate off peak at 5.4% and with it barely having accelerated from six-months ago. But very clearly, inflation still is entrenched. The monthly increase at 0.5% for the headline and 0.4% for the core is too high. The risks for inflation are still substantial and monetary policy has a lot of different situations to juggle in order to solve the inflation riddle and to keep growth on track.