Following a 0.2 percentage point (pp) upwards surprise in December’s headline CPI print, inflation continued to tick higher in January. Despite expectations sitting at 5.4% YoY, signalling no change in the headline rate of inflation from December, the data showed a 0.1pp increase that was driven by a smaller MoM dip in prices relative to January 2021.
Headline inflation now sits at 5.5% YoY, while the core measure rose 0.2pp to 4.4%, again exceeding expectations by 0.1pp following a 0.3pp surprise in December. This is now the highest 12-month inflation rate since the ONS series began in January 1997, and the highest since March 1992 when looking at historical modelled series. The increase in January’s inflation rate places further upwards pressure on the Bank of England’s Q1 projection of 5.7%, especially as core goods inflation is set to pick-up in the coming months.
With inflation now tracking above expectations on a consistent basis and no further CPI report set for release ahead of March’s BoE meeting, markets are likely to run with the idea of a 50bps hike from the Bank at their next meeting. This has been visible in the initial GBPUSD jump back up to the 1.3550 level this morning ahead of the open in short-term interest rate markets. However, given the latest caution in BoE communications and the softer medium-term profile for inflation, we are unconvinced that the BoE will hike rates by more than 25bps in March and again in May despite this week’s strong labour market and inflation data.
Within the CPI data, the largest contribution to the year-over-year increase came from clothing and footwear (+0.19pp), followed by furniture, household equipment and maintenance (+0.05pp) and utility prices (+0.03pp). This more than offset the declines in restaurant and hotel prices (-0.12pp), communication prices (-0.08pp) and alcoholic beverages and tobacco (-0.02pp). The upwards surprise in clothing and footwear, which drove the increase in the headline inflation rate in January, was due to the 2.9% reduction in prices in January 2022 being substantially lower than the 4.8% reduction in January 2021. However, that doesn’t tell the complete story.
The reduction in clothing and footwear prices last month was in fact the smallest decline in prices since 1990 in the ONS’s constructed historical series. Looking ahead, core goods inflation is likely to continue contributing heavily to the rising headline inflation rate in the UK as retailers pass on higher producer prices to consumers, while the fading impacts of Omicron are likely to result in a reversion in consumer services inflation.