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Economy in Brief

UK Inflation Is Still Cooking Hot
by Robert Brusca  November 16, 2022

Inflation in the UK continues to cook hot. In October, the CPIH rose by 1.6% month-to-month, a strong acceleration from the 0.4% gain in September and the 0.3% rise in August. The CPIH core, which excludes energy, food, alcohol, and tobacco, rose by 0.5% after a 0.4% gain in September and a light 0.5% gain in August.

Sequential inflation
Sequentially the CPIH is still running extremely hot; the gauge is up by 9.6% over 12-months, it steps back to an 8.8% annual rate over 6-months and then it accelerates to a 9.4% annual rate over 3-months, nearly the same as it's hot 12-month pace. The core CPIH is up by 5.8% over 12-months, that dials back to 5.2% at an annual rate over 6-months then surges to a 5.9% annual rate over 3-months that pace exceeds even the 12-month pace. Both the headline and the core continue to give the UK authorities hot inflation readings indicating that there is more work to be done on the inflation front in the UK.

Breadth of inflation monthly
The inflation rate had moderated, reducing the breadth of its gains, in September and August. In September inflation accelerated only about 45% of the categories; in August breadth was at 54.5%. These both represent middling breadth in terms of inflation. However, in October, the breadth of inflation (diffusion) is at 90.9% indicating that inflation is accelerating in almost every single category and is not succumbing to the narrowing spread indicated in September's result.

Sequential inflation breadth
Sequentially the diffusion has varied to some extent; over 12-months diffusion is strong with an 81.8% value indicating inflation accelerates in all but about 20% of the categories compared to its pace of 12-months ago. Over 6-months, the breadth steps back to 45.5%, indicating that there's slightly more slowdown of inflation over 6-months then there is acceleration compared to the trend over 12-months. But, over 3 months, diffusion is back at a strong reading of 72.7%, indicating that inflation is accelerating in most categories compared to its 6-month pace.

Sequential inflation's breadth by categories
Sequentially there's only one category that shows a persistence of deceleration in inflation; that's transportation, there the inflation rate is up by 9.3% over 12-months, up at a 4.9% pace over 6-months and then declines at a 7.6% annual rate over 3-months. On the other hand, sequentially inflation is accelerating in healthcare and in restaurants and hotels.

Breadth over the last 3-months
Looking at inflation over the last 3-months - taking each month as an individual vector of observations - there's no industry that has inflation persistently accelerating or decelerating on that timeline. There's a lot of mixture in the inflation rate although; the commonality is that inflation is generally high and too high.

The chart shows big picture trends topping but not so much declining
The chart for the CPIH inflation rate underscores these statistics. I have plotted the sequential rates of change for the CPIH core. These show that inflation has accelerated and then, in recent months, it has vacillated bobbing up and down and currently runs at a pace somewhere in the midst of this recent zone where inflation has been more or less contained. Twelve-month inflation obviously lags the most and it shows the most trend gain still in play, while 3-month and 6-month inflation show inflation has broken lower and has begun to vacillate in a somewhat lower region. All of this suggests that inflation may have seen its peak but there's nothing here to suggest that inflation is ready to move to lower levels to appease the desires of the central bank.

The unbearable fact of stuck, high, inflation
Looking at the inflation rate over the last 3-months, in fact, inflation is intolerably high most everywhere apart from the decline in prices in the transportation sector and the increase at a 1% pace in communications. Communications is a tech category, that chronically tends to run a lower inflation rate. After those two industries, inflation in education reaches a 4.2% pace, recreation and culture reaches a 6.3% pace along with miscellaneous goods and services. Price pressures go up from there. Food prices are rising at a 20.6% annual rate, housing and household expenditure items see inflation at a 17.3% annual rate, and for health care inflation is at a 12% annual rate with restaurant and hotel prices gaining an 11.9% annual rate right on their heels. There's nothing in the distribution of these increases- over 3-months - that gives us reason to believe that inflation is simmering down.

But, 'stuck' also means not accelerating
The most encouraging news from the CPI H core is that over 3-months the inflation rate's 5.9% pace is close to the year-over-year pace of 5.8% even though it's accelerating from 5.2% over 6-months. The clustering of these inflation rates around the 5%-6% level is encouraging, especially in view of some of the very high inflation rates we see prevalent within the body of this report. Sometimes the 'good news' is still not 'great news.'

Bank of England policy challenge
The UK faces inflation that is too high and GDP that has begun to decline. This makes life just a little bit more difficult for central bankers who really don't like to be raising interest rates while the economic activity is shrinking. But, in the face of this kind of inflation news, the BOE probably doesn't have any other choice. The slowdown in the economy should help to temper the increase in prices. But when inflation is running at such a hot pace, the Bank of England has some thinking to do to decide exactly what it needs to do with interest rates to make sure that inflation gets back down inside its 2% target and how quickly it wants that to happen. Central banks need to weigh the excess of inflation relative to target alongside the duration of time that inflation stays outside of the target zone. If inflation remains outside the target zone for a long time, central banks can lose credibility, market expectations can shift, and the central bank may find it more difficult to try to bring inflation to heel at their desired target in the wake of such shifts. The Bank of England certainly wants to prevent that. We'll be watching the Bank's actions in the coming weeks to see what choices it will make. We will also be watching to see how markets react and how GDP and other measures of activity unfold in the coming months. It's a package deal. The central bank must look at everything, but it is only responsible for hitting its inflation target; yet it will be under fire if hitting that objective becomes too costly in terms of growth.

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