he UK – Highest Inflation in 40 Years

Inflation in the UK accelerated further from 9.0% y/y in April’22 to 9.1% y/y in May’22. Main impetus for the high inflation number was related to energy, as following the increase in the OFGEM price cap on 1 April 2022, and higher petrol prices.

Prices for food were relative higher as well in April’22, increasing by 8.5% y/y. Recent numbers are suggesting that inflation will not recede soon. Current retail petrol price as of 20 June 2022 is at 181 pence per litre, which is 9.0% higher relative to average price in May’22 and 39.2% higher than average price in June’21.

The labour market looks tighter, as employment grew by 177k in March (83k increase in February 2022). Anecdotally, recruitment difficulties have remained elevated and labour demand has remained strong.

Nonetheless, the prime reason for the high inflation recently was due to supply factors, including higher commodity prices due to war in Ukraine, and supply chain bottlenecks that pushed up input prices.

Overall, inflation is expected to continue to stay high for the months to come, in line with the Bank of England’s CPI expectation that inflation to average slightly over 10% at its peak in 2022 Q4.

As inflation has hit the highest number in 40 years, we believe that Bank of England will continue to respond by increasing the interest rate to 2.00% by the end of this year, whether we will see 50bps rate hike in August and another 25bps thereafter or simply three consecutive 25bps hike during August, September, and November meeting.

Source: AmInvest Research - 23 Jun 2022