MNI INTERVIEW: UK Inflation Slows But Path Lower Bumpy-Fitzner

While August’s marked decline in UK annual inflation was partly attributable to one-off factors including lower air fares and volatile hotel costs, there are encouraging signs of a steady if bumpy trend lower including a large fall in core services inflation as firms become more reluctant to pass on costs, Office for National Statistics chief economist Grant Fitzner told MNI.

"Our Business Insiders conditions survey continues to show that fewer businesses over recent months have been reporting increases in their cost of doing business and also fewer are saying they are passing on those costs to consumers," Fitzner said in an interview after core inflation fell from 6.9% to 6.2%.

Neither did the survey show signs that wages, often the largest cost for service sector companies, are driving higher costs, he said.

"Wages didn’t start to pick up until headline inflation had picked up, so in crude terms, it does look it’s lagging behind inflation, basically workers trying to catch up with pay increases rather than wages driving inflation higher," Fitzner said. "It’s not simply a narrative of higher wages equals higher services inflation. We found no strong correlation link between strong wage growth and strong prices in service sector," he said.

MIXED OUTLOOK

While October will see a lower OFGEM price cap, pushing monthly and annual contributions from energy prices significantly lower as October 2022 numbers drop out of annual calculations, the short-term outlook for inflation will be impacted by likely further increases in petrol and diesel prices and a weakening in the BOE’s trade-weighted exchange rate index during the first two weeks of September, Fitzner said. A weaker sterling could push prices higher in the near term, adding volatility to headline numbers.

"A lot of goods inflation is imported, which tends to mean it is more volatile -- it tends to rise more quickly, but also fall quickly, as we have seen over the last year. Services inflation is slower to pick up, but slower to deflate. One of the reasons the Bank of England focuses on services inflation quite a lot,” he said.

The ONS has no “ready-reckoner” to work out how dollar rises in oil prices feed through to headline inflation, Fitzner noted, despite the stats office having several stabs at trying to tie a causal link down.

"It does vary. The level of passthrough tends to be greater when oil prices are going up than when they are going down, although some of that is supermarkets absorbing costs and volatility with a month-to-month smoothing of volatility," he said.

"A link is something we can look at again and hopefully have something ahead of the next monthly bulletin due in early October but it would be a very rough rule of thumb on both the level of pass through and the pace of passthrough," he said.