Investment Clock insights

Headline UK CPI falls… Still no convincing pick-up in domestically-driven inflation


Melanie Baker

19 June 2019

There was still no strong message of upward domestically-driven inflation pressure in this release, even digging beneath the surface.  That gives the Bank of England (BoE) some cover to sound more neutral on the rate outlook if they see risks to growth as shifting to the downside. 
Headline inflation fell back to the BoE’s target in May, from 2.1%Y to 2.0%Y. That was both in line with consensus and in line with the BoE staff forecasts in the May Inflation Report. The big downside contributor was transport services, especially air fares (a reversal of last month’s boost from Easter timing effects). There were upward contributions – though modest on average – from most other major categories. RPI again surprised on the upside, remaining at 3.0%Y against expectations of a one-tenth decline, driven by the housing depreciation component (i.e. high house price inflation), see chart 4 below.     
Despite upward contributions from most components on inflation this month, given the rise in pay growth seen over the past year or so and weak continued productivity growth, it is still surprising that indicators of domestically driven CPI inflation aren’t stronger: 
Core CPI inflation (i.e. ex-food, energy, alcohol and tobacco) ticked down a tenth to 1.7%, though that was a touch stronger than expected, see chart 1.  
Our own measure of core services inflation rose a touch, but still looks relatively weak (see chart 2)
Looking at CPI components by import intensity, the most ‘domestic’ element of CPI inflation declined and is below the average seen since 2006 (chart 3).

There was still no strong message of upward domestically-driven inflation pressure in this release, even digging beneath the surface. That gives the Bank of England (BoE) some cover to sound more neutral on the rate outlook if they see risks to growth as shifting to the downside. 

Headline inflation fell back to the BoE’s target in May, from 2.1%Y to 2.0%Y. That was both in line with consensus and in line with the BoE staff forecasts in the May Inflation Report. The big downside contributor was transport services, especially air fares (a reversal of last month’s boost from Easter timing effects). There were upward contributions – though modest on average – from most other major categories. RPI again surprised on the upside, remaining at 3.0%Y against expectations of a one-tenth decline, driven by the housing depreciation component (i.e. high house price inflation), see chart 4 below.     

Despite upward contributions from most components on inflation this month, given the rise in pay growth seen over the past year or so and weak continued productivity growth, it is still surprising that indicators of domestically driven CPI inflation aren’t stronger: 

Core CPI inflation (i.e. ex-food, energy, alcohol and tobacco) ticked down a tenth to 1.7%, though that was a touch stronger than expected, see chart 1.  

Our own measure of core services inflation rose a touch, but still looks relatively weak (see chart 2)

Looking at CPI components by import intensity, the most ‘domestic’ element of CPI inflation declined and is below the average seen since 2006 (chart 3).

Chart 1

Source: Thomson Reuters Datastream as at 15/05/2019

Chart 2

Source: ONS, BoE, RLAM, Datastream

Chart 3

Source: ONS and RLAM as at May 2019

Chart 4

Source: Thomson Reuters Datastream as at 15/05/2019

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.