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UK Headline CPI Remains in Double Digits

This morning has seen the UK’s headline CPI inflation figures remain in double digits, against estimates that it would drop into single digits for the first time since August 2022.

This morning’s data print reiterates the scale of the challenge that the Bank of England has in trying to get inflation back in line with its 2% target, as markets now weigh on whether the MPC will opt for a 25bps rate hike on 11th May.

While the headline rate of inflation eased from last months figure of 10.4%, it remained 0.3 percentage points above expectation, coming in at 10.1%. The fall in the rate of inflation on an annualised basis was chiefly driven by easing energy costs, which last year had been subject to meteoric supply and demand side pressures including the Russian invasion of Ukraine and economies’ post pandemic recovery. Furthermore, on a month-on-month basis the price of heating oil fell by 6.7% between February and March 2023, compared with a rise of 44.0% between February and March 2022. This comes as petrol prices eased from £1.60 in March 2022 to £1.47 in March 2023.

According to the ONS “there were also downward effects from housing and household services, furniture and household goods, clothing and footwear, and restaurants and hotels.” Nevertheless, food and non-alcoholic drinks were one of the the key drivers of consumer prices remaining elevated, though this comes as food price inflation eases across the globe. Here, the index rose to 19.2%, marking its highest rise in 45 years as vegetable shortages persisted.

In a reminder of the prevalence of ‘sticky’ inflationary pressures which have become embedded into the economy, the Core CPI index – which excludes volatile items such as food and energy – also came in hotter-than-expected at 6.2%. This is just down from September’s all-time peak of 6.5%.

RPI also came in considerably hotter-than-expected hitting 13.5%, against market expectations of 13.3%. While this marked a drop in the rate of inflation from last month’s print of 13.8%, it signals some concern given its potential implications on CPI further down the line as retailers face pressure to raise prices. The rise in RPI is also concerning given that some 25% of the UK’s debt is linked to the index and comes as UK government borrowing has hit record highs. Moreover, given that RPI is used to determine the price increases of items such as train tickets, the rise will mark a key cost pressure for many households.

Following UK’s the hotter-than-expected inflation print, there has been a bid on sterling in early morning trading as markets now fully price in a hike of 25bps from the Bank of England on 11th May. As markets weigh on further monetary tightening from Threadneedle Street, the domestically focused FTSE 250 has come under pressure with the index slipping around 0.5%.

The yield on the UK 10-year bond has also risen above 3.75%, some 14bps above the US 10-year benchmark and 127bps above the German 10-year bund. Meanwhile, the FTSE 100 has shrugged off domestic headlines around inflation with the blue-chip index rising around 0.1% this morning.

Chinese Growth Comes in Hotter-than-Expected

Yesterday saw markets react to Chinese GDP coming in higher-than-expected at 4.5% for Q1 2023 on an annualised basis. This was chiefly driven by strong growth in exports and infrastructure investments while the country’s property sector also showed some signs of recovery. The print marked a sizable increase from Q4 which saw a release of 2.9% and beat market expectations of 4%.

Yesterday’s release follows the CCP announcing their lowest growth target in decades and gives some hope that the world’s second largest economy may see better than expected growth over the year. The 5% target for 2023 comes after a difficult year for China as far as growth is concerned with Beijing recording that the Chinese economy expanded just 3% over 2022. The Chinese Premier Li Keqiang citied a host of domestic and international reasons why growth will likely continue to be under pressure this year, not least China’s fragile property sector and fragile relations with Washington.

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