How the Bank of England will read into outdated inflation data
Can data be redundant? The Office for National Statistics will this week give the impression that inflation is stable. Economists have predicted the consumer price index inflation print for the year to February to come in at three per cent, like last month, which would have otherwise made for satisfactory reading.
But the figures precede the US and Israel’s decision to launch strikes on Iran, and the subsequent closure of a trading passage which is critical for around a fifth of the world’s oil and gas supplies.
It wasn’t too long ago that Chancellor Rachel Reeves was talking up the Office for Budget Responsibility’s forecasts showing inflation coming down to the two per cent target by next month.
We all know that higher inflation is (already) back. The Bank of England has said that a 60 per cent rise in fuel prices will cancel out that drop to two per cent, with inflation likely to remain above three per cent next month.
Investors and policymakers are panicking over the US and Iran’s exchange of threats and climbdowns over strikes against energy infrastructure across the Middle East. UK government officials met in an emergency session to consider the financial impact, oil and gas prices are bouncing around, gilt traders have over-analysed Bank of England statements, even gold is slumping after a glittering start to the year.
The impacts of these market movements on inflation, growth, public finances and the jobs market will only be made clear by the ONS in the coming months.
Ministers are meanwhile attempting to hold firm on the government’s cost of living message. For families across the country, Reeves’ Budget measures to re-arrange energy subsidy costs away from household bills (and onto general taxation) will still at least be seen. The Ofgem energy price cap in April will fall by £117 as this month’s international market prices only feed into it from July. Fuel duty will also remain frozen until September as forecourt prices surge.
Ministers are also set to leap on data suggesting that inflation in February remained steady.
The key inflation data points for the Bank
The rest will be left for markets to analyse and Bank of England economists to consider. Monetary Policy Committee members will search for any indication that, at least structurally speaking, the UK economy is not as vulnerable to a sudden price shock as it was in 2022 after Russia’s full-scale invasion of Ukraine.
For one, services inflation, which is a better measure for how “sticky” price growth is because it provides some indication of the impact of wage costs on firms, is expected by several City forecasters to drop slightly. Core inflation, which excludes food and energy, is set to hold steady.
These data points may provide some comfort that the UK economy is better protected from so-called “second-round” effects – where high wage growth pushes inflation higher, and vice-versa – than it was in 2022.
Interest rate-setters will also be alert to underlying risks. Food prices could rise slightly, according to Deutsche Bank analysts. Higher grocery prices tend to rattle UK households and feed into higher inflation expectations, which could translate into more disturbing behavioural price-setting trends.
If that’s not enough to put investors and officials on high alert come Wednesday, then several MPC members’ speaking engagements on Thursday will. Sarah Breeden, the deputy governor who turned hawkish at the last interest rates decision, will be a panellist at a Resolution Foundation event while Megan Greene and Alan Taylor are also scheduled to speak at investment events.
Traders who were stumped by the MPC’s bold statement that it was “ready to act” against another energy price shock and potentially hike interest rates this year will look for any signs that policymakers are feeling slightly more dovish.
While inflation data that doesn’t reflect the wider impact of the war is unlikely to rattle markets, it could sway MPC members’ feelings about the wider economic outlook. You can’t just shrug off economic data.