UK Losses Grip on PPI Inflation

You can like Mervyn King, Governor of the BOE, and BOE itself. But that bank has lost its grip on inflation, at the PPI level and that is chilling. PPI inflation has absolutely surged sending the CORE PPI rate up by 6.3% Yr/Yr and the three month core rate to 11.8% in arise reminiscent of the 1970s bell-bottoms and Carnaby Street – all that along with its destructive episode of inflation. Of course the RPC/HICP inflation measures are more important ones, but these sorts of pressures at the factory gate level spell bad news for inflation elsewhere in the economy. PPI headline inflation is bristling at a 10% paces and over three-months UK headline inflation is over 17% for the PPI. All that is very bad news indeed.

The second chart shows that the core HICP inflation rate has remained much more stable in the face of rising oil prices and even the rising PPI results. Still, there have been several step ups in the HICP pace and right now there is the threat of an acceleration that may be taking root.

As is the case in the US there is more pressure at the PPI level than at the consumer prices level in the UK. UK the core PPI inflation has a correlation with the core HICP of only 0.25, in R-square terms that is only 0.06 – a very low association.

The BOE may be able to keep this wolf at bay. But what is shocking for the moment at least is the degree of pressure that is being mounted on the PPI. If only a fraction of it gets into the HICP it will be too much. With this report in hand and with PPI data more topical by a full two months (June for the PPI Vs April for the HICP) inflation trends at the consumer level will be under the microscope in the UK.