Panmure Gordon says that the UK’s inflation rate is not as high as recent data would have us believe.
Simon French, Panmure’s Chief Economist, said that while both headline and core prices are higher than expected in the UK and among the highest in the Group of Seven countries. He also stated that the importance of energy bills is likely underestimated by many commentators.
French wrote to clients on Friday that “energy bills are expected to drop sharply next month and again in September” to explain the UK’s unique status.
This analysis may provide ammunition for the doves in the Monetary Policy Committee of the Bank of England. The central bank has already raised interest rates too much, they say. They also claim that higher borrowing costs are going to hurt the economy. Swati Dhingra voted last month to keep the interest rates at their current level.
For now, inflation numbers above expectations and BOE forecasts have prompted bets on the majority of policymakers to continue raising the key rate throughout the summer.
Panmure’s notes also challenge market expectations that the BOE base rate would need to be raised to 5.5%. Traders increased their bets following the surprise increase in official inflation data released last week. This pushed up the costs of mortgages and loans.
French stated that “the last week saw UK inflation exceptionalism becoming a consensus with a detrimental blowback to the UK economy, rate path and capital market,”
Despite the fact that nine out of 12 categories of the Consumer Prices Index in the UK have experienced higher inflation since the beginning of 2020, the biggest spread has been in the housing, water, electric and fuel components. These items make up almost a 7th of the UK CPI basket.
French stated that this item would be the most important in bringing UK CPI’s price dynamics into line with other countries.
French, however, said that he believed inflation would “stick above 2% for an extended period” and that rates of interest would reach 5%.