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July 17, 2023

UK a different story; unlike the US 'soft landing' outlook: CPI trends and BoE's rate cycle

US 'soft landing' outlook back on the table after last week's lower-than-expected 3% CPI release
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In-house blogger
Guest blogger
Meghna Shah
,
Macro Strategist & Chief Economist
Macrobond
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.
Editor:

UK CPI will be released tomorrow early morning, let's dig a little deeper. 

Why this print is important: Last week marked the US ‘soft landing’ outlook back on the table post the lower than expected US CPI release at 3%. 2 year UST yield dropped a sharp 35bps, and the market re-aligned towards one last rate hike by the Fed in July (against Fed’s own projected two steep hikes in 2023).

UK remains a different story so far: 13 consecutive rate hikes since 2021 from 0.1% to 5% on the back of elevated CPI prints, with headline still stubbornly higher than target. 

CPI internals for previous release (May’2023) powered by Macrobond charts:

  • Chart 1 - May CPI at 8.7% saw headline Services inflation (7.3%) rising further while Goods inflation (9.7%) stayed stubborn
  • Chart 2 - Positive MoM momentum (0.7% for overall CPI) and across categories in May, no price pressures ebbing (CPI Heatmap)
  • Chart 3 - Headline prints have remained elevated tracking higher contribution from both cost push as well as demand pull (boost in services consumption) factors: Spike in gas prices within Housing inflation; 2. Higher rentals, 3. Higher food & beverages inflation, 4. Restaurant and Hotel services and 5. Clothing and footwear inflation

Expectations for the June data release: Estimate June CPI to be ~8.3% basis our multivariate forecast model using Indicio (Chart 4). Further CPI prints up to August likely to decelerate basis:

  • BoE’s steep rate tightening cycle to impact consumption with a lag
  • cost push factors post war gradually to abate
  • some correction seen in House price sentiment 
  • base effects

BoE policy implications: June estimate at 8.3% v/s target of 2% implies BoE has more ground to cover to contain inflation before taking a policy pause

The above story through our charts: 

Chart 1: May CPI at 8.7% saw headline Services inflation (7.3%) rising further while Good inflation (9.7%) stayed stubborn

Chart 2: Positive MoM momentum (0.7% for overall CPI) and across categories in May, no price pressures ebbin

Chart 3: Headline prints have remained elevated tracking higher contribution from both cost push as well as demand pull (boost in services consumption) factors: Spike in gas prices within Housing inflation; 2. Higher rentals, 3. Higher food & beverages inflation, 4. Restaurant and Hotel services and 5. Clothing and footwear inflation

Chart 4: June CPI print est at 8.3%, further softening sub 8% by September likely

A line graph showing the growth of the stock marketDescription automatically generated

Note: The Indicio model helps nowcast and merge various frequency data (daily natural gas prices, weekly gasoline pump prices, monthly wages etc).

Learn how you can forecast like a PhD quant with Macrobond x Indico.

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