UK – Inflation Beats Market Expectation

UK inflation accelerated further to 10.1% in July 2022 from 9.4% in June, making it the highest reading ever recorded in 40 years (cons.: 9.8%). This was also relatively higher than our expectation of 9.6%.

Core inflation, excluding energy on the other hand, increased to 6.9% in July from 6.2% in June.

The latest reading brings the year-to-date average to 8.0%. The main impetus for the high inflation was due to the higher retail petrol prices in July at £1.894/litre, which is 3.0% more than June's £1.838/litre and 43.6% higher than July 2021's £1.319/litre.

Another reason for the high inflation was food & non-alcoholic beverages, which also increased by a double-digit 12.6% y/y (9.8% y/y in June 2022), signalling inflationary pressure already spilling into other components.

Higher living cost is nudging people across the country to demand higher wages as inflation-adjusted regular pay dropped 3.0%, the highest decline in record. Railway workers are planning another round of strikes to demand better pay and working conditions this week.

The BoE said in its last meeting that it sees UK inflation peaking at 13.3% in October, and it expects recession to start in the fourth quarter, lasting throughout the year 2023.

The upside risk to inflation will be the Ofgem's price cap revision which will also put more pressure on inflation. Currently, energyrelated inflation is contributing around 30% to the overall CPI basket.

As expected, the runaway inflation news was not well received. The GBP/USD dropped after the high inflation number was released. Prior to the news, the GBP/USD was trading around 1.2121, and dropped to 1.2050, down by -0.59%, the lowest since 5 Aug 2022.

With inflation surprising on the upside, the possibility of a 50bps rate hike is priced in for the next meeting which will be held on 15 September.

Source: AmInvest Research - 18 Aug 2022