Inflation data “stronger than expected”, says Invesco


Paul Jackson, Global Head of Asset Allocation Research at Invesco, comments on this morning’s inflation data:

“Stronger than expected”

“The UK Office for National Statistics today published CPI inflation data for December that was stronger than expected, though but PPI data was below expectations. Sterling strengthened slightly upon release of the data but then weakened to below where it was pre-data (it has been on a weakening trend over the last week). Early indications are that the market-based implied probability of a rate hike in February have increased to 98%.

“Consumer prices (CPI) increased by 5.4% in the year to December (Bloomberg consensus estimate 5.2%), up from 5.1% in November (and 0.6% a year ago). This is the highest inflation rate since the 7.1% recorded in March 1992. CPI increased by 0.5% in the month of December, after 0.7% in November (the annualised gain in the last three months is 9.6%, suggesting prices are still accelerating). Core CPI (CPI excluding energy, food, alcoholic beverages and tobacco) also increased by 0.5% on the month to give a 12-month gain of 4.2% (Bloomberg consensus suggested a 3.9% gain), up from 4.0% in November. RPI inflation was 7.5% in December (from 7.1% in November) and when mortgage payments are excluded the rate of inflation was 7.7% (versus 7.2% in November).

“We expect UK inflation to eventually come back towards the BOE target as base effects and one-off pandemic related effects drop out of the data”

“Judged by core CPI, inflation remains well above the BOE target of 2%. Though we expect UK inflation to eventually come back towards the BOE target as base effects and one-off pandemic related effects drop out of the data (and lower money supply growth works its way through the system), we suspect the peak may not arrive until mid-2022, especially given the large upward revision to the energy price cap that is expected in April. One encouraging factor in the short term is that PPI input price inflation may have peaked (the 0.2% drop in December gave a 12-month gain of 13.5%, down from 15.2% in November). This should eventually result in lower PPI Output inflation (9.3% in December, from 9.4% in November).

“We view the BOE’s stance as very accommodative”

“The BOE has already started to tighten policy and we expect this to continue over the coming months and quarters. Bearing in mind the balance sheet expansion that has taken place during the pandemic, we view the BOE’s stance as very accommodative. We think the BOE will raise its policy rate to at least 1% by the end of 2022 (from the current 0.25%), with more to come thereafter. Markets are currently pricing in a rate of 1.25% by the end of the year, with the next rate hike likely coming at the 3 February meeting (the market implied 98% probability of a rate hike at that stage is now higher than it was yesterday). The BOE is a long way from what we would consider to be “normal” and we therefore expect this tightening cycle to last for a number of years. We expect the BOE to be more aggressive than both the Fed and the ECB, which could result in an appreciating pound over the coming year or so.”



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