UK Reaction: UK CPI continues to edge higher

• CPI inflation continued to rise to 5.5% (y/y) in January from 5.4% in December above consensus expectations of inflation remaining flat at 5.4%.
• Inflation is set to increase further still, peaking above its current level in Q2 2022 at around 6.7%, but we expect it to ease thereafter.
• Increases in clothing and footwear prices drove the beat, suggesting that price gains have moved beyond energy for now.
• Further upside inflation surprises likely add pressure for the MPC to increase rates further. We expect the decision to be finely balanced in March but given the continued pressure on real incomes households face, we expect the BoE to keep rates at 0.5%.

The UK Consumer Price Index (CPI) edged higher to 5.5% (y/y) in January from 5.4% in December, setting a new 30-year high. This reading came in a touch above consensus estimates of a 5.4% rise. This marks the highest level of inflation since March 1992, when it stood at 7.1%. Core CPI inflation (excluding food, energy, tobacco and alcohol prices) also rose to 4.4% (from 4.2% in December), also ahead of the consensus forecast. Core inflation now also stands at its highest level since 1992. RPI measures of inflation also rose sharply, RPIX to 7.8% and its highest level since 1991. This release came alongside a slight update of CPI weights with a reorienting towards services. We expect to see a more granular update alongside February’s print.

Increases in the price of clothing and footwear, and furniture and household goods drove the rise. Changes in the pattern of discounting during the pandemic saw less discounting than previously seen in January 2021. This pattern was also seen in furniture and household goods. This rise was partially offset by restaurants and hotels, in part due to the impact of January lockdowns on these sectors.

Inflation is set to surge to around 7% in the coming months, with the peak set to be in April when utility prices are raised. We now expect inflation to come in at 5.5% in 2022 (up from 4.5%). The inflation outlook continues to contribute to a challenging period for households, with the combined impact of rising prices and taxes set to weigh heavily on the consumer.

We expect discussions of a March hike will remain live for the MPC particularly given continued upside surprises to inflation but given the risks of further monetary tightening adding to a challenging period for real incomes, we expect the BoE to signal a more cautious path. We expect the MPC to delay their next hike until May and expect rates to reach 1.00% in August where we expect them to stay into 2023 – far short of market expectations.