UK June-24 CPI Inflation Report
Catch 22 is still on: persistent CPI service inflation and higher actual rents for housing
Key takeaways:
UK Consumer Price Index (CPI) increased by 2.0% year-over-year (y/y) in June, slightly above market consensus (at 1.9% y/y), and unchanged when compared to May's figure.
Core CPI in June increased by 3.5% y/y, also matching consensus and May’s figure, both at 3.5%. This confirms a slow reduction of core inflationary pressures in the UK.
Inflationary pressures are primarily concentrated in the service sector, with an increase of 5.7% year-over-year, whereas the goods sector is experiencing deflation, with a decrease of 1.4% year-over-year.
The primary factor behind recent inflationary pressures is the housing component of the Consumer Price Index (CPI) (see previous post). In June, actual rents for housing increased 7.2% y/y (versus 7.0% y/y in May and 5.5% y/y in June 2023).
Our supercore service inflation, which removes actual rents for housing from service inflation, increased by 5.4% y/y (same as in May).
The “Taylor Swift” effect has probably impacted the high reading of restaurants and hotels (0.9% m/m and 6.2% y/y) driven by the accommodation component (3.3% m/m and 9.8% y/y). (H/T Chris Marsh)
The acknowledgment of the Catch-22 effect along with the “Taylor Swift” effect would rationalize the beginning of the cutting cycle in August 2024.
Review of the Inflation Release
In June 2024, consumer prices increased by 2.0% year-over-year (y/y), maintaining the same rate as in May 2024 and marking the lowest level since 2021. On a month-to-month basis, prices rose by 0.1%, compared to a 0.3% increase in May.
Core CPI, which excludes food and energy, rose by 3.5% year-over-year (y/y), matching the consensus forecast of 3.5% y/y (see Chart 1). On a month-to-month basis, it increased by 0.2%, down from 0.3% in May. The services sector remains the primary driver of inflation, with a 5.7% y/y increase in June, the same rate as in May. Conversely, the goods sector continues to experience deflation, recording a -1.4%y/y decrease in June, slightly more than the -1.3% y/y in May.
Chart 2 highlights the dichotomy between the persistent inflation in services and the quicker adjustment in goods prices.
Chart 1: Headline and Core CPI (% YoY, last datapoint: June 2024)
Source: UK Office of National Statistics (ONS).
Chart 2: All Services and all Goods (% YoY, last datapoint: June 2024)
Source: UK Office of National Statistics (ONS).
As anticipated, the Catch-22 effect remained strong in June, with the housing component continuing to be the primary driver of inflationary pressures (Table 1). Actual housing rents rose by 7.2% year-over-year (y/y) in June, up from 7.0% in May. On a month-to-month basis, rents increased by 0.4% (the same as in May), reinforcing the upward trend observed since September 2021.
Consequently, supercore services, as previously defined in in a previous post (see Chart 3), increased by 5.4% y/y, remaining unchanged from May 2024 but still at persistently high levels.
On the service and supercore inflation front, there is some positive news with a slowdown in the month-over-month readings. Supercore service inflation rose by 0.5% m/m, down from 0.7% in May and 1.5% in April, while service inflation increased by 0.6% m/m, the same rate as May but lower than 1.2% in April.
These current readings confirm the persistence of the service component of inflation. The data suggests that relatively higher inflation rates should be expected well into Q1 2025, assuming no other economic shocks, as rising rental costs continue to impact the economy, particularly the service sector.
Recognizing the Catch-22 effect could justify the start of the rate-cutting cycle in August.
Chart 3: Supercore CPI and Shelter CPI (% YoY, last datapoint: June 24)
Source: UK Office of National Statistics (ONS).
Table 1: CPI by components (% YoY)
Source: UK Office of National Statistics (ONS)
Table 2: CPI by components (% MoM)
Source: UK Office of National Statistics (ONS)