United Kingdom: Inflation shaped by energy shock – ING

James Smith at ING highlights that UK inflation pressures remain concentrated in energy, with food and services inflation surprisingly subdued. Headline inflation printed 3.5% in September and is expected to peak near 4% in winter, but measures of energy-intensive and core services inflation show little sign of broadening second-round effects from the Iran War-related energy shock.

Energy-driven but limited pass-through

"Seven months on from the start of the Iran War, and there’s still no sign that the UK’s inflation shock is broadening out beyond energy. Second-round effects are so far non-existent."

"Headline inflation was admittedly a tad above consensus at 3.5% in September, though in line with our forecast. What’s particularly eye-catching, though, is the month-on-month fall in food prices. This caps a remarkably benign period for food inflation. No doubt it will pick up into the winter, not least given the recent rise in natural gas prices. But all the models tell us we should be seeing some effect of the energy shock in food – and so far we aren’t."

"Partly as a result, our calculation of ‘energy intensive’ inflation has actually fallen this year and shows little-to-no sign of picking up. This remains the case even after stripping out last year's increases in water bills and car taxes, which would otherwise distort the picture. This gauge tracks inflation categories that are classed as having either ‘very high’ or ‘high’ energy intensity by the Office for National Statistics – and range from food to cafés."

"Services inflation also looks fairly well-behaved. The jump in the headline services CPI to 3.7% (from 3.4%) was exaggerated by airfares, which are notoriously volatile. Remove these jumpy categories, as well as those that are indexed, and the Bank of England’s preferred measure of ‘core services’ inflation is still relatively contained – albeit up slightly over the past few months. This echoes the calm picture of private-sector wage growth, which sits at 3.4% after accounting for compositional effects."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)