High Core Inflation May Warrant Rate Hike Tomorrow

Main points

• Annual consumer price inflation was 8.7 per cent in May, unchanged from April. This resulted from price decreases in motor fuels being offset by price increases in food, travel, and recreational and cultural goods and services.
• Food inflation fell to an annual rate of 18.3 per cent in May from 19.0 per cent in April. That it remains so elevated is concerning since there is no government support to help households (especially lower income households, who spend a greater part of their incomes on food) offset this cost.
• The latest figure of 8.7 per cent represents an upside surprise in headline inflation. Though annual energy price inflation has decreased by 44.3 percentage points between May 2022 and May 2023, food inflation has increased by around 10.3 percentage points in this time. Food is weighted higher than energy in the CPI: Electricity, Gas and Other Fuels is weighted by 49/1000 whereas Food is weighted as 107/1000. At the same time, the rate of inflation of services and non-energy industrial goods has plateaued around 7 per cent, unsurprisingly close to today’s core CPI figure of 7.1 per cent. This positive surprise is thus a story of increasing food inflation and persistent core inflation overtaking dropping energy prices.
• Core CPI inflation (CPI excluding energy, food, alcoholic beverages, and tobacco) rose to 7.1 per cent in May, its highest rate since March 1992, from 6.8 per cent in April. It remains well above the series average of 2 per cent. At the same time, NIESR’s measure of underlying inflation, which excludes 5 per cent of the highest and lowest price changes, fell only slightly to 9.9 per cent in May from 10.2 per cent in April. Trimmed-mean inflation being higher than core inflation indicates that the energy price fall which has driven headline CPI down is a rather volatile price movement. Overall, these figures suggest that we have yet to see a meaningful turning point in underlying inflationary pressure in the UK.

For a breakdown of what inflation is and how it is calculated, read our blog post here.