U.K. Inflation Continues Its Spurt

Inflation in the United Kingdom surged, rising by 1.1% in March after gaining 0.6% in both February and January. Inflation, using the HICP measure- which is also the CPI for the U.K. - continues to accelerate from a 7% pace over 12 months to 9.3% over six months to a 9.5% annual rate over three months. Inflation in the U.K., like in the U.S. and like in Germany, is running loose and it's too hot for the central bank’s inflation target of 2%. And in the U.K., that target continues to apply to the CPI (or HICP) although the official inflation rate in the U.K. is the CPIH which also includes an estimate for housing services much like the U.S. CPI. The CPIH rose by 1% in March, accelerating from 0.5% in February and 0.5% in January. It is accelerating and a little bit less sharply from 6.3% over 12 months to 8.3% over six months to an annual rate of 8.7% over three months. The rate of change of the CPIH is a little bit less than for the CPI and its acceleration from 12 months ago is also tamer. But the signals and changes are broadly similar.

There's also available, currently, an ex-food, ex-energy (and ex-alcohol) core measure for the CPIH. That metric is also accelerating, the 0.8% gain in March is up from 0.4% in February and 0.6% in January. The CPIH core accelerates from a 5.2% pace over 12 months to a 6.3% pace over six months to a 7.6% pace over three months. This gauge is running a little bit less hot than the CPI and the CPIH, but its acceleration is nearly the same as for the CPI measure.

Turning to the 10 categories of the CPIH in the table, inflation is accelerating in March in five of them. In both January and February, inflation accelerated month-to-month in five of them as well. In addition, inflation in the various headline series also accelerated month-to-month except for February when the CPIH and core measures did not accelerate - but only the core rate backed down.

The diffusion indicators at the bottom of the table capture the breadth of acceleration; these are calculated using even the headlines in the table to provide a little bit more weight to those categories that deserve more weight. The aggregate diffusion measure shows inflation in January, February, and March that has continued to run with pretty much the same breadth with inflation accelerating at about 60% of the categories with some slight let-up in February when that percentage fell to 46%.

Looking at sequential behavior, inflation from 12-months to six-months to three-months we see that over three months there's acceleration across the 10 categories in half of them. Over six months we see acceleration everywhere with one exception that being communication. And over 12 months we find the same thing with acceleration everywhere except for communication.

At the same time, the diffusion statistics show the breadth of inflation over 12 months has moved up to 92% which is sharply higher than it had been over 12 months for the 12-month period previous to this when inflation was only rising in 23% of the categories and the headline for the CPI was up only 0.7%. Inflation over the last 12 months has accelerated extremely sharply and extremely broadly. Over six months inflation has continued to accelerate, running up to a very high pace and accelerating by more than two-percentage points between 12-months and six-months with the breadth of acceleration in 92% of the categories. Over three months there is some backing off as the headline continues to accelerate slightly to a 9.5% pace from a 9.3% pace. The CPIH shows slightly more acceleration (six- to three-months) and the CPIH core measure shows even more acceleration, but the details of the report show that across all inflation readings inflation only accelerated and about 61% of the categories over three months. That is still broad, well above the neutral reading of 50%, but well back of the 92% marks set over six and 12 months.

Over three months in those categories where inflation has backed off accelerating, the results have not been particularly dramatic. For food & nonalcoholic beverages, the inflation rate nicked lower to 8.1% from 8.2%; for housing and household expenditures the inflation rate annualized over three months stands at 5.1% compared to a 6.2% pace over six months. Health care costs rose by only 1.7% at an annual rate over three months compared to 2.6% over six months. Education costs rose at a 3.3% pace over three months compared to 5.3% over six months. And miscellaneous goods & services prices rose at a 1.5% pace over three months compared to 2.5% over six months. While there are 5 categories where acceleration backed off, half of the detailed categories, over three months the backing off was modest and in the end dominated by acceleration in other categories.

Monetary policy While the CPI and the CPIH show slightly different results, they really don't have very different stories to tell from the standpoint of monetary policy. The Bank of England which tends to look at the CPI rather than the official CPIH gauge will still be quite disturbed by the acceleration and the high level of inflation. Germany reported elevated inflation statistics the United States that continues to report very high inflation statistics. Inflation continues to be an individual problem in many countries as well as a problem globally. Oil prices that have hovered more than increased continue to hover at a high level. There continues to be disruptions with raw materials and there continues to be supply chain problems, some of them exacerbated by the war and the sanctions involving Russia.

Summary and outlook There's really nothing statistical in the data to cause us to feel relieved on inflation. Economists are beginning to talk about inflation peaking in various places, but this is mainly because oil prices have stopped rising. There continues to be war and supply chain issues that could easily make inflation worse before it gets better. There are indications of increasing worker militancy over wages and a wage-price spiral would be another tough nut for central banks to have to crack. In fact, the outlook for inflation has too many unknowns to be very certain about it. Central banks are taking actions and for those that provide forward guidance they continue to urge us to believe that they are getting control of it and that the conditions will be less inflationary at the end of the year than they are now. In part, conditions are so bad now it gives us a strong reason to want to believe and hope that they're right. But the risks to inflation remain and there's nothing in data to suggest to us that we've turned any corner.