- ONS announced today that UK CPI inflation rises again in February to 10.4% as food prices stay painful.
- Likely to mean the Bank of England will raise rates tomorrow by 0.25%.
- Markets calmer ahead of Fed rate decision, as policymakers mull a rate hike.
- Stocks on Wall Street gained ground, giving a positive lift to trading in Asia.
- Oil price hovers around $74 amid continued worries about effect of banking scare on growth.
Commenting on the latest inflation data and market moves, Susannah Streeter, head of money and markets, Hargreaves Lansdown, said:
‘’There is no respite for punishing inflation for consumers and companies, with prices becoming even hotter in February. There had been high hopes that it would finally have retreated from its double-digit heights, making a march downwards, but it has headed back towards the summit. As restaurants and hotels ratchet up prices faced with the high costs of food and labour, its feeding through to unpalatable hikes for customers. Shoppers are struggling with higher food and clothing prices too, with the cost-of-living headwinds showing little sign of dying down. It had been touch and go about whether the Bank of England will raise rates but now with consumer price inflation rising to 10.4% on the month, it looks increasingly likely a hike will voted through tomorrow. Although the banking turmoil will be front of mind, this latest snapshot and ongoing worries about a tight labour market are likely to tip the balance in favour of a rate hike.
There are concerns that the banking scare will end up being a disinflationary force by leading to a knock-on effect on lending which could hit the spending of companies and consumers, if loans are a bit harder to come by. The housing market is already reeling from the effects of a spike in mortgage rates and if lenders turn more cautious it could be another gut-punch. So given the potential headwinds which could whip up, the risk is that a hike now could end up pushing inflation below target further down the line. This is likely to be more of a background concern for policymakers right now, particularly as action to stem contagion in the banking sector appears to be working, but it may still mean a hike tomorrow will be the last one in the line.
Markets have exhaled in a sigh of relief that the cavalry is standing by ready to charge in if the banking flank suffers fresh casualties. There is a growing expectation that given the chaotic events of the past fortnight, the end of painful interest rate hikes is now on the horizon in the US. The Fed will be the subject of intense focus later today as its rate decision is due, with an increase of 0.25% still expected despite the turmoil.
There will be considerable psychology at work, as a pause at this stage could inflame worries by being taken to indicate that policymakers are rattled. Instead, they may prefer to shore up confidence by keeping to a pre-set path for now, particularly given that stability has returned. Concerns about the future of First Republic Bank have been assuaged by indications the US Treasury would step in to backstop deposits. But as we’ve seen sentiment can turn very quickly and investors will be hanging on every word from Fed chair Jerome Powell for indications about when a pause will come. The oil price is still reflecting concern about the knock on effect of the banking turmoil on growth and is hovering around $74. However, its gained ground since last week as central banks and the US government have reinforced the pledge to take fresh action if needed.”
Other experts have also been sharing their reaction to today’s data with Wealth DFM as follows:
George Lagarias, Chief Economist at Mazars comments: “UK inflation surprisingly accelerated. This was mostly due to higher energy and food costs, not discretionary consumption. This confirms our earlier view that the recent OBR year-end 2.9% inflation projections may have been on the optimistic side.
“On the one hand, the number confirms that the economy is not slowing down as much as originally expected. On the other, the CPI figure paints a grim picture for consumers who are facing more difficulties meeting everyday expenses.
“Inflation above 10% could pull wages higher, increasing costs for businesses.
“Consumer prices remain uncomfortably high, putting additional pressure on the Bank of England which, like other central banks, has to decide between fostering financial stability and persisting on its fight against inflation.”
Nathaniel Casey, Investment Strategist at wealth manager Evelyn Partners, says: “Inflation has shocked almost everyone by re-accelerating in February. In monthly terms, headline CPI jumped by a sharp 1.1%, while the headline annualised rate has increased slightly, shielded to a certain extent by the base effects coming in from last year. This stickiness has been especially prevalent in core inflation which gained 1.2% on the month, it’s largest month-on-month acceleration since 1993.
“Looking at the contribution components to inflation, a large part of February’s acceleration can be attributed to restaurants and hotels, with the category increasing at its fastest annual rate since 1991. Food and non-alcoholic beverages also contributed heavily with their annual rate the highest for over 45 years, vegetables were a notable mention, with a poor crop yield in Europe and Africa reducing supply.
“The main issue seems to be tightness in the labour market continuing to put pressure on wage growth. The risk is that rising wages will feed through to inflation, causing it to become entrenched. The latest data shows that underlying wage rates (ex-bonuses) have re-accelerated to 6.5% on a three-month moving average, near its highest rate since the summer of 2021.
“This resurgence of inflation leaves us a long way off the Office for Budget Responsibility’s forecasts of inflation coming down to 2.9% by the end of 2023. While inflation continues to remain elevated, the Bank of England have a fine line to tread between restoring price stability and limiting additional pressure on the banking sector when they vote on the next monetary policy decision tomorrow.”
According to Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services, the Bank has been put between a rock and a hard place tomorrow as he comments:
“Today’s inflation figures, showing an increasing inflation rate, puts the Bank of England between a rather large rock and a hard place in attempting to curtail still-strong inflationary headwinds while under immense pressure from the banking sector’s turmoil.
“While the increase in headline inflation to 10.4% will worry the Bank, recent pronouncements suggest that its eyes are squarely focused on persistently stubborn core inflation – a far better indicator of domestic price pressures. It will hence be far more concerned by the increase in core CPI, from 5.8% to 6.2%, even if slight.
“This has, together with the banking sector’s upheaval, thrown into disarray the Bank’s rate-hiking plans. Will it raise rates further and signal the continuation of its process, in accordance with its inflation-fighting mandate? Or will it decide that the risks in the banking system is a greater threat, and ease rises anyway? We will find out on Thursday.”
Isabel Albarran, Investment Officer at Close Brothers Asset Management says: “After a bumpy start to the week, today’s UK inflation data adds a further complication for the MPC, with headline inflation unexpectedly reaccelerating to 10.4%. This was primarily down to a surge in food prices (related to recent salad shortages) and strong core services pricing, which relates to labour costs. The “lettuce effect” is not expected to continue but services inflation could be a graver concern for the MPC, though recent labour market data does show early signs of easing.
“For a second week, banks have been in focus. Days after Silicon Valley Bank (SVB) failed, Credit Suisse has now been acquired by its arch rival UBS. Central bankers are thinking about financial stability but also price stability, with recent events expected to tighten credit conditions, which could see growth forecasts downgraded. Looking ahead to tomorrow’s BOE interest rate decision, we still expect the central bank to tighten to combat inflation but, like the ECB, it will likely favour data-dependency instead of indicating further rate hikes.”
Richard Carter, head of fixed interest research at Quilter Cheviot said : “Just as in the US, the path downwards for inflation is fraught with difficulties and will not be a smooth journey, with CPI coming in at 10.4%, rather than the expected single digits. Given the market movements of late, this puts the Bank of England in an incredibly difficult position as it may not be enough for the Bank of England to press pause on the rate hikes. The rhetoric from the BoE will continue to be that inflation is the primary concern, however, events in the banking sector have somewhat taken over and the Monetary Policy Committee has been seeing significant divisions on the best way forward. But with this inflation reading, the picture is incredibly clouded and the case for further rate hikes is strengthened.
“Given the pressure to pause lately, the BoE will have been hoping that rates at 4% will be enough. Just last week the Office for Budget Responsibility predicted inflation would be at 2.9% by the end of the year – a very steep drop off from the current level and an increasingly ambitious target following today’s print. How much the banking crisis will have changed this prediction remains to be seen, but it does feel a very punchy estimate.
“This has certainly been a unique set of circumstances that central banks have had to face. The fallout from the failures of Credit Suisse and Silicon Valley Bank only add to the complexity and make a policy mis-step all the more harder to avoid. The BoE may not be at the end of its interventions yet, and as has been seen in the US, inflation isn’t a simple thing to tame.”
Rupert Thompson, Chief Economist at Kingswood, said: “UK inflation unexpectedly increased in February, rather than edge lower as had been anticipated. The headline rate rose to 10.4% from 10.1% while the core rate moved up from 5.8% to 6.2%. Furthermore, services inflation jumped to 6.6% from 6.0% which will reinforce worries over continued price pressures. These numbers will increase the pressure on the BOE tomorrow to raise rates by a further 0.25% to 4.25%, rather than pause as had been looking quite likely due to the current strains in the financial sector. A decision to continue raising rates will be made all the easier if the Fed today follows the lead of the ECB last week and increases rates further.”
Luke Bartholomew, senior economist, abrdn, said: “UK Inflation unexpectedly jumped in February from 10.1% to 10.4%, well above both consensus and the Bank of England’s forecasts. Headline inflation should start to fall again soon, and is still likely to decline rapidly over the course of the year.
“But more concerningly, core inflation increased from 5.8% to 6.2%. This suggests that underlying inflation pressure may be harder to squeeze out. We still think a pronounced economic slowdown is a necessary condition for sustainably returning inflation to target in the UK.
“While some Bank of England policy makers have been signalling that they think policy may now be sufficiently restrictive, this report means that there is still work to do until policy is appropriate.
“The BoE’s policy decision tomorrow still looks like a tight call given recent market volatility. However, we think the combination of stronger activity data, higher inflation, and the current lull in market stress means that the Bank will deliver a 25bps hike tomorrow.”
James Lynch, Fixed Income investment manager at Aegon Asset Management agrees it was a “big surprise” commenting: “This is the first increase in the headline inflation rate in the UK for four months, from 10.1% to 10.4%, but off the peak of 11.10% set in October. This was a big surprise to the upside that no one was expecting, including the BoE.
“It appears the rise is coming from the services and hospitality sector – restaurants and cafes putting prices up of alcohol – and also more broadly the cost of food is still rising. Along with the other component of clothing and footwear, it really was a broad-based strong print.
“Not forgetting the previous inflation print was missed to the downside, today’s data print will certainly raise some eyebrows at Threadneedle street, right before the policy setting meeting.”
