Macro and market events – UK May CPI inflation

Could the Bank of England’s double-digit inflation forecasts become reality? Our article explores inflation, rising interest rates and the impact on investors.

CPI Raising Inflation Jun 22
Daniel Casali, Chief Investment Strategist, Evelyn Partners Investment Management LLP
Published: 28 Jun 2022 Updated: 14 Apr 2023

The latest CPI annual inflation shows an alarming 9.1% rise. This was in line with consensus estimates and suggests that the Bank of England’s forecasts of double-digit inflation by the autumn may become a reality. The CPI reading was the highest since the series began in 1997 and exceeded the 9% figure for April. That said, month-on-month inflation slowed somewhat, from 2.5% to 0.7%.

Energy and food price rises have been the most significant contributors to inflation. However, in May, core annual inflation, which strips out food, energy, alcohol and tobacco was still at 5.9% (consensus: 6.0%), showing pricing pressures are universal. Nevertheless, this represented a marginal slowdown on April’s reading of 6.2%, with a slower monthly increase of 0.5% versus 0.7% in April.

Despite the modest deceleration in core CPI inflation and the notable weakening in economic activity seen in the latest UK GDP statistics, the Bank of England’s Monetary Policy Committee (MPC) is likely to remain resolute until there are clear signs that inflation is peaking. With that in mind, financial markets are still pricing in a 0.5% rise in interest rates at the Bank’s next three meetings (4 August, 15 September and 3 November). This would raise the current base rate from 1.25% to 2.75% by November and to around 3.6% over the next 12 months.

Higher UK interest rates are supported by three factors

First, the Bank of England forecasts CPI inflation peaking above 11% in October, reflecting the rising cost of energy and a broadening out of price increases in other sectors. At the same time, wage rates are at the high end of their historic range. The Bank of England will be keen to prevent a wage-price spiral that could see inflation become entrenched in the economy.

Second, near-term inflation expectations continue to remain elevated. The YouGov household survey of CPI inflation over the next 12 months is close to a record high of 6.1%; however longer-term inflation expectations are about two percentage points lower. The worry is that inflation expectations start influencing buying decisions. The Bank of England is conscious that inflation expectations have become de-anchored, at least in the short term, from 2% targeted inflation.

Finally, in the latest CBI industrial trends survey, businesses signalled their intention to raise wholesale prices to their highest level since 1989. Retail price expectations seem to have peaked, but they remain very high compared with recent history. Lingering supply-chain disruption from the pandemic continues to drive prices higher, with China’s zero Covid policy a particular problem. Against this backdrop, the Bank of England is relying on domestic economic activity falling as real incomes are squeezed. This should bring demand lower to match supply.

The backdrop of high inflation and rising interest rates has implications for investors. Markets are likely to remain febrile until there is some resolution in sight. Nevertheless, there are sectors less sensitive to rising interest rates. These include energy and material stocks, which are currently trading on historically low valuations. It should focus investor attention on characteristics such as pricing power and supply chain security in their analysis.


All figures stated have been sourced from Refintiv, as at 23 June 2022

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