Inflation Hits 5.4% in December ... U Rate Falls To 4.1% ...

Goods Inflation Rises to 6.9% ...
Headline CPI hit 5.4% in December, up from 5.1% prior month. Goods inflation increased to 6.9% from 6.5%. Service sector inflation was up just 0.1% to 3.4%.

Fears are increasing for the hike in energy bills to be expected in April. The reality of rising energy costs is already with us. Fuel prices were up 23% in the month. Electricity bills were up 19%. Gas prices were up by 28%.

Petrol prices were up 27%. Flight costs were up 29%. Thinking of buying a second hand car? You will be paying 29% more than December 2020. Inflation pressures are increasing. Oil prices moved higher last week. The Houthi attack on Abu Dhabi spooked oil prices. The prospect of a Russian invasion of Ukraine rattled gas prices. Even so, gas prices fell 10% in the week, down by almost 50% from peak last year.

The Bank of England expects inflation to peak around 6% in April. The more pessimistic think the high could be around 7%. We still expect prices to peak in the first quarter of the year, easing to around 3.5% by the end of the year. The Governor of the Bank of England, Andrew Bailey now expects prices to remain above the 2% target into 2023. Really?

Producer Prices Easing ...
Manufacturing output prices (PPOs) eased to 9.3% from 9.4%. Input costs (PPIs) eased to 13.5% from 14.2%. Oil prices and metal prices featured in the cost mix along with chemicals. Oil prices Brent Crude averaged $50 dollars on December prior year, compared to $74 dollars in 2021. The inflation impact eases by the second quarter this year and is eliminated into the second half, assuming oil trades between $75 - $80 dollars over the period. OK, Oil traded higher last week closing at $87.63 but this was down from the mid week freak.


International shipping costs are easing. The Baltic Dry Index fell to 1,415 last week.  The index peak hit 5,500 in October last year. Shipping costs from China to the East Coast USA are also easing, down 20% from peak last year according to Freightos.

The big fear for the UK central bank is wage costs will respond to the cost of living squeeze in a tight labour market. The latest jobs data will have done little to alleviate concerns.


Want to know more about our forecasts for inflation and our models used in the process? You can access our twenty page TSE Inflation Chart Book on our Flipsnack Channel. It's a bit geeky but worth a look.

Unemployment Rate Falls to 4.1% ...
The latest jobs data made for incredible reading. The unemployment rate fell to 4.1%. The number unemployed fell to 1,382,000. The number of vacancies in the economy increased to 1,247,000. There were 32.5 million in employment, compared to 32.2 in November 2020.

Whole economy earnings eased to 4.2% from 4.9% prior months. Real earnings adjusted for inflation CPI were negative -0.9%. We expect earnings to slow further to 3.5% towards the end of year. Assuming our projections for inflation are correct, the cost of living pressures will ease into the second half of the year.

Over half of the vacancies in the economy are in health and social, retail, accommodation and food. The correlation between vacancies and unemployment by sector is significant. The anomaly is in health and social. There are over 200,000 vacancies in the sector with a relatively smaller number out of work compared to the overall sector average.

Will our wage forecasts hold in a tight labour market? This week, MPC member Catherine Mann warned of a "self perpetuating cycle of pay and price rises". We must "lean against stronger for longer inflation." The 25 point base rate rise could happen when the MPC meets again in February.

Want to know more about our forecasts for jobs and wages used in the process? You can access our ten page TSE Labour Market Charts on our Flipsnack Channel. It's a not quite so geeky but worth a look.
That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets down, Bond Yields Up, Crypto Crashes, Tech Stocks Tormented, Sterling Back in Place, Don't Miss that!

Have a great weekend,


John
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