Britain’s Home-Grown Price Pressures Finally Easing for the BOE

nvqk)}o3t49qfxwu0qaz8go[_media_dl_1.png Office for National Statistics

Article content

(Bloomberg) — For years, economists and policymakers have scratched their heads over Britain’s inflation problem.

Article content

Even as post-pandemic supply shocks faded and neighboring countries regularly hit their inflation targets, the Bank of England struggled to curb the UK’s stubborn home-grown price pressures. 

Article content

Article content

Today, Governor Andrew Bailey finally has a different story to tell on the domestic front: an improvement that buys his Monetary Policy Committee precious time as officials try to avoid hiking interest rates in response to the US-Iran war.

Article content

Article content

The BOE is likely to strike a wary tone in its latest decision on Thursday as the recent resurgence in global oil and gas prices threatens to blow it off course. But there are signs that Britain’s home-grown inflation problem may be fading fast.

Article content

Article content

“The data is suggestive of softer domestic input cost pressure than really anything we’ve seen, I would argue, since before the pandemic,” said Simon French, chief economist at Panmure Liberum. “Therefore, that argument for why you need to be tightening monetary policy is softening quite quickly.”

Article content

The parts of Britain’s consumer shopping basket that are the least import intensive, a proxy for domestic pressures, are stoking inflation far less than last year. The contribution of these items — which include housing rent, hairdressing and beer — to headline inflation has fallen to its lowest since around the time of Russia’s invasion of Ukraine in early 2022. Overall price growth has fallen to 2.6%, the lowest in 15 months.

Article content

Private-sector pay growth, once a source of rising costs for British companies, has cooled to below 3% for the first time since 2020, a level now consistent with the BOE meeting its 2% inflation target. Meanwhile, economic growth is pedestrian and a once-tight labor market has loosened considerably with fewer vacancies for more unemployed people.

Article content

Article content

The BOE is expected to leave rates on hold at 3.75% this Thursday, as it tries to navigate the fluctuations in oil and gas prices since the Iran war broke out. A more benign domestic situation is fast being overtaken by events abroad with oil prices hitting $100 a barrel in recent days. The hangover from the initial shock is still coming through the pipeline, too, with household energy bills climbing 13% in July when the UK’s price cap updated.

Article content

“Headline inflation is still above the target; it’s going to pick up in July, we all know that,” said Bruna Skarica, chief UK economist at Morgan Stanley. “But underlying services inflation has been falling for a year now, as have pretty much every measure of pay growth as well.” 

Article content

The UK is not out of the woods yet on inflation. The latest rocketing of oil and gas prices raises the risk of second-round effects from firms and workers trying to compensate for the squeeze by passing on price increases and bidding up wages. Hawks on the committee including Chief Economist Huw Pill and rate-setter Megan Greene have also feared that the easing in price pressures stalled even before the conflict.