Janus Henderson Investors: UK inflation slump piles pressure on tardy MPC

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The forecast here a year ago was that the MPC would cut Bank rate to 0.5% during 2019. This was wrong in fact but right in spirit, as reflected in a significant downward shift in the yield curve.

he expected cut was probably pushed back by Brexit and election
uncertainty but recent MPC communications and this week’s weak GDP and
inflation data suggest that it will be delivered on the 30 January
decision date.

The consensus thinks that a big enough bounce in January flash PMIs
released next Friday could yet persuade the MPC to hold fire. This is
doubtful and Tuesday’s labour market report may be more important –
confirmation that employment has stalled and earnings growth is cooling
would probably cement a January cut.

The volatile air fares component contributed to a decline in core CPI
inflation to 1.4% (1.37%) in December, a three-year low, but there were
also downward moves in food, non-energy industrial goods and
recreational and personal services. A November post suggested
that the core rate would fall further based partly on a lagged
relationship with core producer output price inflation, which continued
to plunge last month – see first chart.

UK-inflation-slump-piles-pressure-on-tardy-MPC_chart01
UK-inflation-slump-piles-pressure-on-tardy-MPC_chart01
UK-inflation-slump-piles-pressure-on-tardy-MPC_chart01

From a causal perspective, inflationary pressures are ebbing in lagged
response to a fall in annual broad money growth – as measured by
non-financial M4 – from nearly 7% in late 2016 to below 3% in late 2018:
the monetarist rule of thumb is that money trends lead prices by about
two years on average, although the relationship can be temporarily
disrupted by large exchange rate swings (such as the post-EU-referendum
depreciation) – second chart. The suggestion is that core inflation will
continue to ease through 2020 barring a sizeable fall in sterling.

UK-inflation-slump-piles-pressure-on-tardy-MPC_chart02
UK-inflation-slump-piles-pressure-on-tardy-MPC_chart02
UK-inflation-slump-piles-pressure-on-tardy-MPC_chart02