Sometimes the devil is in the details – Commerzbank

A look at the data shows that in the UK most of the disinflation in the core rate over the past year has come from goods prices. If inflationary pressures on goods prices had not eased so much, the core rate would not have fallen as much. Services inflation, on the other hand, is much more persistent and is currently almost entirely driving the core rate. It is therefore not surprising that the Bank of England (BoE) has repeatedly stressed that it wants to see more progress here, notes Michael Pfister, FX analyst at Commerzbank.

Sometimes the devil is in the details

“Durable goods peaked first in the current cycle during the pandemic. On the other hand, real incomes have also suffered from the subsequent rise in the other components. Durable goods consumption is likely to be the first thing consumers cut back on when incomes become tighter. Moreover, supply chains have loosened considerably since then, which is likely to put additional downward pressure on prices.”

“This is unlikely to continue forever. Real incomes are rising again and at some point consumers will need durable goods again. In addition, freight transport has become more expensive recently. The first signs of a trend reversal can already be seen in the data, and inflationary pressures are likely to rise again. This would not be dramatic if inflationary pressures from other sources continued to decline.”

“Services prices would be predestined to do so. However, looking at the first tier of subcomponents, price pressures are much more widely distributed. If durable goods prices stop falling but services prices remain stubbornly high, there will be little scope for lower underlying interest rates in the UK. And correspondingly less scope for the Bank of England to cut interest rates more sharply.”