Striding Strongly Beyond Quirks

• Over the past week, markets continued their hawkish repricing towards our forecast. High wage data and hawkish comments helped, despite low UK CPI inflation. The cause (re-weighting) means it was not a dovish development, while RPI inflation was high.
• Next week’s calendar is packed with the flash PMIs and final inflation data for January in the EA and many of its member states. We’re currently tracking an upward revision. Weighing changes may impact the outlook more than the granular index levels.

It’s been the busy week of the month for UK data releases, with tight labour market data, inflation distorted by re-weighted airfares, and retail rebounding out of its downwardly revised hole. There has also been movement on the political front. Scotland’s First Minister Nicola Sturgeon announced that she would stand down, exciting many in Westminster but unlikely to bale the ruling Conservative Party of its political hole.

Indeed, before Sturgeon’s announcement, Alastair Newton explored how ongoing ‘events’ further weaken UK Prime Minister Rishi Sunak’s already limited ability to keep the members of the Parliamentary Conservative Party in line. Despite what’s at stake, domestically and internationally, he thinks this does not bode well for Sunak’s ability to ‘sell’ an emerging compromise with Europe over Northern Ireland (see EU/UK: Still ‘Schleswig-Holstein’).

The UK data releases kicked off with the unemployment rate matching expectations by staying at 3.7% in Dec-22, but it will probably hit 3.8% in Jan-23 because the underlying 3-month trend rise has returned to 0.2pp. Labour demand is too high, with weekly vacancies stabilising up at Sep-22 levels. Pay deals are also settling at 5%, boosting weekly pay despite workers off on strikes. This cyclical tightness and excessive inflation expectations push the BoE to keep raising rates, albeit by 25bps rather than a “forceful” 50bp (see UK: Cyclical Turn is Taking Too Long).

Separately, UK retail sales rebounded in Jan-23 from a downwardly revised December to leave the negative trend intact. Unseasonable warmth probably aided the bounce. A slower inflationary impulse would curb its depressing effect on sales volumes, but expansion also requires spending value growth to regain pace. Ongoing BoE rate hikes squeeze affordability, yet better mortgage deals may spare housing from crashing deeply (see UK: Sales Briefly Warmed in Jan-23).

UK inflation delivered mixed surprises in Jan-23 as the RPI remained at 13.4% while the CPI crashed to 10.1%. Transport weighting changes exaggerated the latter’s downside. Increased airfare weightings in January have historically reversed in February. To the extent it persists, the high weight will stoke CPI seasonality. Despite the surprisingly low headline, the underlying inflation impulse is more than double the BoE’s target, encouraging it to keep hiking. Upscaled seasonality hacking the CPI to its low forecast is not dovish (see UK: New Weights Stoke CPI Seasonality).

Market commentators and many participants focussed on the low CPI rather than appreciating the cause. However, high wage data and hawkish comments from Huw Pill, contrary to recent misperceptions, supported the US-led move. Overall, the market added half a hike to end-23 pricing and removed a 2024 BoE and Fed cut, taking another stride towards our forecast.

Preview: EA inflation in Jan-23 (final)

Eurostat’s flash release for Jan-23 undershot our forecast by 20bps, despite us already being 0.4pp below the economic consensus (see EA: HICP Limbos Under Jan-23 Forecasts). However, Eurostat estimated inflation in Germany after Destatis postponed its flash release, and it appeared to be assuming something inappropriately akin to a seasonal average. We highlighted that as excessively low and maintained our forecast.

Germany’s belated print proved to be 0.8pp under the consensus but was within 2bps of our energy-depressed forecast. That was still about 66bp above Eurostat’s implicit assumption, which would add 18bps to the EA aggregate (see EA: Germany Pushes Jan-23 HICP Revision). Since then, Spain’s final release printed 6bps stronger while France was nearly 2bps higher. Ireland partially offset that with a 19bps reduction.

Overall, these factors add another basis point to our tracking estimate of 8.64%. That EA headline would round as a 0.1pp upwards revision, but it is perilously close to rounding up again, which would better reflect the 19bps change we expect. There is also more uncertainty than usual about the Jan-23 HICPxT amid revisions like these, imminent weighting changes, and seasonal tax hikes (N.B. time series for tobacco tax in each country are on our data access page). We forecast an 8.73% y-o-y rate on a 119.93 index level. We also expect the details to confirm that housing energy prices drove the latest disinflation rather than anything more reflective of underlying pressures.

Figure 1: Contributions to m-o-m EA HICP inflation

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