Bond yields jump as they begin to price in more BOE rate hikes, and higher for longer than previously imagined.
By Wolf Richter for WOLF STREET.
Inflation is infamous for its head-fakes and has a tendency to dish out one nasty surprise after another – at least for observers that keep expecting that inflation will somehow go down on its own. Today, the inflation shocker occurred in the UK. And this is a warning for all economies: inflation has gotten solidly entrenched in services, and is getting even worse.
Core CPI spiked month-to-month by a scary 0.8% in May, which translates into an annualized spike of 10%, according to data from the UK Office of National Statistics (ONS) today.
Year-over-year, core CPI spiked by 7.1%, the worst since March 1992. Core CPI excludes energy, food, alcohol, and tobacco. It has now left in the dust the false-hope declines that started in November.
|Major Components, Core CPI||MoM||YoY|
|Housing, household services||0.3%||7.3%|
|Furniture and household goods||1.1%||7.5%|
|Recreation and culture||0.7%||6.8%|
|Restaurants and hotels||1.0%||10.3%|
|New and used vehicles||0.5%||4.2%|
|Miscellaneous goods & services||0.6%||6.7%|
Services CPI spiked by 0.8% in May from April (10% annualized) powered by the spikes in routine maintenance +1.2%, transportation services +3.3%, including air fares +20%, recreational and cultural services +1.1%, insurance +1.1%.
Housing and household services rose “only” 0.3% for the month (but was up 7.3% year-over-year).
Year-over-year, the service CPI spiked by 7.4% in May. Inflation in services is notoriously hard to stamp out. And it’s where all heck has now broken loose – in what is a global phenomenon.
Food inflation rages at a slightly less horrible pace. The CPI for food and non-alcoholic beverages spiked by 0.9% in May from April (11% annualized), which is terrible, but it’s less terrible than in prior months. Bread and cereal: +0.8%; fish +1.8%; oils and fats +0.9%; vegetables +2.1%; sugar, jam, syrups, chocolate, and confectionary +1.7%; mineral water 1.1%.
But coffee, tea, and cocoa fell 1.6% month-to-month; fruit and meat rose “only” 0.4%; and milk, cheese, and eggs rose “only” 0.5% (that’s still 6.2% annualized).
Year-over-year, the CPI for food soared by 18.4% in May, and while horrible, it was down from 19.1% in April and from 19.2% in March, the worst since 1977, according to the ONS’s “indicative modelled estimates” (its actual CPI data don’t go back that far).
But don’t blame Brexit for food inflation: there are countries in Europe with worse food inflation, including 34% in Hungary. In Germany, which didn’t have a Dexit or whatever, food inflation was 14.9% in May.
But motor fuel prices plunged by 13.1% year-over-year, after having spiked by as much as 44% last summer.
Overall CPI jumped 8.7% in May year-over-year, same as in April, and by 0.7% month-over-month (8.7% annualized), despite the plunge in motor fuels. Overall inflation had peaked at 11.1% in October.
This is the case everywhere globally: Plunging energy costs have pulled down overall inflation indices, even as the indices for underlying inflation, such as core CPI and services CPI, continue to rage near or at multi-decade worst levels. This scenario is now playing out wonderfully in the US and in the Eurozone:
But don’t blame Brexit for inflation in the UK: there are 10 countries in continental Europe with worse overall CPI inflation:
The one-year UK government bond yield, in reaction to the inflation news, rose by 12 basis points to 5.20%, the highest since 2008, as it begins to price in higher BOE policy rates than previously expected:
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