News & Analysis

Headline UK CPI increased 0.1 percentage points from April’s reading to hit a fresh 40-year high of 9.1% YoY in May. This was largely in line with economists’ expectations, which saw CPI increasing at 0.7% MoM.

Most of the contribution to the one-month change in the annual rate came from higher food and non-alcoholic beverage prices (+0.22%). Compared to April’s reading, which saw household utility bills provide the biggest contribution to the monthly headline change (+1.59%) due to the Ofgem price cap adjustment, prices for housing, water, electricity and other fuels only rose by 0.01% in the month from April. Although the headline rate of inflation continued to grind higher, there were signs of optimism in today’s report for the doves within the Bank of England, as not only did the core measure fall from 6.2% to 5.9% YoY, but initial signs of reduced price pressures in the services sector appeared. This is the first time the core YoY measure has fallen since September 2021.

Last week, the Bank of England hiked rates by a further 25bps to 1.25%. Recent inflation reports meant that none of the members within the MPC dissented in favour of holding rates.

Throughout the minutes, the Bank cited concerns that the broadening of inflation pressures into services and the risk of self-sustaining momentum in domestic-driven inflation when justifying their decision to continue tightening policy. However, today’s report now shows that some of those domestic-driven price pressures may be starting to ease. Not only did the core measure of inflation fall, but price growth in services components of the CPI basket began to moderate, and in some cases even reverse course. The monthly change in the 12-month rate of price growth in restaurants and hotels, for example, was flat in May despite rising 0.14% and 0.22% in the two months prior. The same can be said for miscellaneous goods and services following a 0.1% increase in April. Meanwhile, the rate of change in the 12-month reading for clothing and footwear along with recreation and culture was negative. While the first derivative of the 12-month rate of clothing and footwear has been negative since April, largely due to inventory distortions, the rate of change in recreation and culture prices completely reverses the increase seen in April.

On the back of today’s release, we expect markets to trim their expectations that the Bank of England will conduct a string of 50bp increases such that Bank Rate sits north of 3% by year-end.

The impact this has on GBP is still uncertain, in our view, as expectations priced into money markets remain so disconnected from the Bank’s own communications, suggesting STIR traders are constantly setting themselves up for disappointment. This is especially the case if inflation reports continue to print in the same manner as today’s report. For August’s meeting, the doves among the MPC – Tenreyro and Cunliffe – will need to see continuing signs that inflation pressures from higher energy costs and supply-chain disruptions aren’t filtering through to higher services price growth.

Inflation pressures narrow in May and largely stem from higher food and non-alcoholic beverage prices


Simon Harvey, Head of FX Analysis


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