HC-AM Morning Report - UK Inflation Hits 6.2%

Good Morning,

Here are this morning's headlines:

CPI- UK CPI hit 6.2% over February, exceeding market expectations of 5.9% and representing the highest level since of inflation since 1992. Moreover, the month-on-month rise of 0.8% between January and February is also the fastest climb since 2009 as the price of wholesale energy, food and durable goods shoot up. Of particular note is the 5.1% y-o-y rise in food prices, the 8.9% rise in the price of clothing and the surge in the costs of gas and electricity which risen 28.3% and 9.2%, respectively.

Core CPI – which excludes food and energy prices – also beet predictions by 0.2 percentage points surging from 4.4% to 5.2%. RPI also stood at 8.2% while PPI hit 14.7%.

BoE Inflation Predictions?- This morning’s print follows the BoE’s statement last week where they predicted that inflation would hit around 8% in April (when the energy price cap is lifted 54%) with the potential for this to hit double digits in Q3 if there is another hike in the price cap. These sentiments were expressed after the BoE’s latest interest rate decision whereby their dovish approach caught the market by surprise as eight members of the committee voted to hike by 25bp while Jon Cunliffe voted to keep rates unchanged. Just a few weeks earlier, there had been murmurings of the prospect of a 50bp rise – however this was subdued following the Russian invasion of Ukraine. The BoE’s dovish sentiments emphasises how Threadneedle Street are deeply concerned over the prospect of growth for the UK economy. Indeed, Cunliffe’s primary concern was over the detrimental implications that the Ukrainian Crisis would have on consumer confidence and household income, and its potential to stifle economic activity. Hence, the BoE see themselves in a precarious balancing act - which if the rate of growth slows and inflation continues to rise will only get harder to manage.??

Such views are indicative of the wider concerns within the British economy, with growth predictions being downgraded across the board. For example, earlier this month, the British Chamber of Commerce revised its expectations for UK GDP growth in 2022 from 4.2% to 3.6% citing a pessimistic outlook for consumer spending and a weaker than expected rebound in business investment. The BBC also forecasted that by Q4 2024, UK exports would remain 13.7% lower than pre-pandemic level owing to the post-Brexit complications and a slowdown in the demand for UK goods and services. Hence, given these mid- and long-term impacts to the UK economy the BBC forecasted growth to be 1.3% in 2023 and 1.2% in 2024.

Global Economy- The downward revision in UK growth forecasts is also illustrative of the outlook for the global economy more generally. For example, just yesterday Fitch cut their global GDP predictions by 0.7 percentage points to 3.5% given the impact that Russian sanctions could have on global energy supplies. In Europe, Fitch also raised the possibility of ‘outright shortages and energy rationing’ as they slashed their expectations of growth in the Eurozone by 1.5 percentage points to 3.0%. Moreover, owing to the non-transitory inflation, the fact that the Fed would need to raise rates higher than previously expected will cause a drag on developing economies given their US denominated debt.

Looking Ahead-No.11 will also be mulling over today’s higher than expected inflation print, ahead of Chancellor Sunak’s Spring Statement which will be delivered later today at 12:30. Notwithstanding this morning’s inflation print, there have been growing calls for the Treasury to do more to tackle the growing cost of living to UK households – including a U-turn in the planned increase in National Insurance contributions by 1.25%. Uncharacteristically, there has been little in the way of murmurings of any new policies that Sunak may announce – although given that public debt has surged to 95% of GDP (its highest level since the 1960s), today’s statement will definitely be one to watch.?

?

???????????????????????? ?

Have a great day.