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Economy in Brief

U.K. Inflation Slows Suddenly in July; Will the Deceleration Stick?
by Robert Brusca  August 18, 2021

U.K. inflation has slowed suddenly in July. The CPIH gauge rose by 0.1% in July, making the Bank of England the envy of every other central bank globally. The Federal Reserve especially, but also the European Central Bank, have been overshooting their respective inflation targets but arguing that the overshoot is transitory. This sharp break in U.K. inflation may give other central bankers hope that their outlook is true and not just wishful thinking that allows them to procrastinate doing something that is uncomfortable or politically dangerous for the moment.

The U.K. CPIH rate rose by just 0.1% month-to-month in July after gaining 0.6% in June and 0.4% in May. This slowdown reduced the year-on-year pace to 2.1% in July from 2.5% in June. The year-on-year CPIH gain also was 2.1% in May.

U.K. inflation has run nowhere near as hot as inflation in the U.S. Still, there was some overshooting occurring and in prospect. Now, suddenly, inflation is much better-behaved. Inflation slowed broadly falling month-to-month -or running at an unchanged pace- in all the major CPIH categories in the table for July. The slowing is no fluke. But will it have staying power?

The question of staying power is a different matter. While the month-to-month deceleration was broad, producing three categories showing month-to-month price declines and one zero gain, longer term inflation gauges continue to run hot.

Inflation still accelerates over 12 months compared to the rate of 12-months earlier. Six-month inflation is higher than the 12-month pace and three-month inflation is higher than the six-month pace. There is considerable inflation acceleration that is already baked in the cake. Not only are those trends valid for the headline but they also hold for the core CPIH (CPI excluding energy, food, alcoholic beverages & tobacco).

For the record, the U.K. HICP index tends to have these characteristics as well. It demonstrates sequential acceleration and even the same sharp month-to-month slowing of inflation in July. The break in inflation is not simply a function of using the CPIH.

Among the ten major CPIH categories presented in the table, six accelerate over three-months compared to six-months. Nine of them accelerate over six-months compared to 12-months. But only four of them accelerate over 12-months compared to their 12-month pace of 12-months ago.

During this period the U.K. has experienced another step up in the rate of Covid infections. The most recent wave of infections peaked on July 17 and has since dropped sharply but the pace of infections has remained stubbornly high, and yet well below that July peak. Despite this infection wave, U.K. daily deaths have remained steady at a very low level there is now only a very small step up in the pace of deaths.

For the most part, growth appears to be advancing with little interference from the virus. But the virus lurks. And it has hit different countries with different degrees of force. New Zealand has implemented a three-day lockdown of Wellington in the wake of a single infection discovery. Australia has major policing efforts to enforce some of its lockdowns. Experiences vary. Here in NYC as of this week you need proof of vaccination to go into restaurants. There are some masking rules as well. And variants are still being produced; we do not know what curve ball this virus will throw us next.

For the time being, service sector businesses are being integrated back into the global economy at varying speeds and running into backtracking or slowdowns when virus outbreaks occur. But growth overall seems to be solid and continuing everywhere. U.K. GDP has been particularly robust, showing exceptional growth in Q2 2021 after experiencing a decline in Q1. The U.K. has the strongest four quarter increase in GDP among European countries featuring the 19 EMU members. The beat goes on…

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