Following the release of yesterday’s labour market data for February, which showed some positive signs on the whole but an upside surprise in the headline measure of wage growth, all eyes were on this morning’s release of UK CPI data as the burden of proof for the Bank to pause in February had increased.
For those still expecting the Bank of England to hold rates in May, which included ourselves, today’s inflation data didn’t make for pleasant reading. Surprising to the upside for a second consecutive month, headline inflation printed at 10.1% YoY, as a 0.8% MoM increase in prices eroded most of the negative base effects provided from March 2022. This not only outstripped economists’ expectations which looked for a headline reading of 9.8% YoY and 0.5% MoM, but also printed 0.9pp above the Bank’s projected inflation rate for March (9.2% YoY).
Although strong price gains in food and non-alcoholic beverages accounted for a large portion of the monthly increase (0.13pp), the distressing signs for monetary policymakers is that significant price increases were also visible within discretionary goods and services with recreation and culture (+0.14pp), clothing and footwear (+0.10pp) and restaurants and hotels (+0.17pp) all contributing heavily. Moreover, calculations of monthly core CPI, which aren’t presented directly by the ONS, show it remained at 0.7% MoM, making it difficult for the MPC to argue that core price pressures are easing.
In a similar fashion to yesterday’s jobs report, however, there were still signs for positivity, especially in the Bank’s preferred measures.
Core services inflation excluding airfares, package holidays and education, a measure emphasised by MPC, continued to grow at a slower rate than Bank staff anticipated in the February MPR. BoE projections suggest the core services inflation should increase by 6.8% in March, but the reading once again undershot, coming in at just 6.6%. This level is, by our calculations, flat on last month’s number, and seems likely to have peaked.
With Bank of England policymakers conditioning a further 25bp hike on an upside surprise in wage growth and core services inflation, data released over the past 24 hours has meant that another 25bp hike is almost an inevitability in May.
Whilst there are some underlying signs that the inflation backdrop is beginning to ease, especially in the bank’s preferred measures of wage growth and core services inflation, we think the Bank will struggle efficiently communicating a pause given the strong outturn in the conventional metrics. With significance placed, not just of the evolution of underlying data, but also the ability to anchor expectations, retaining broad confidence that they are committed to cooling inflation, will take centre stage for the MPC in May. Nonetheless, given the preliminary signs of optimism, which will soon filter through into headline readings, we think another 25bps hike by the BoE in May will be the last of this cycle, leaving Bank Rate at a terminal level of 4.5%.
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst