UK inflation at fresh 40-year high

Edward Bell - Senior Director, Market Economics
Published Date: 23 June 2022


  • Fed chair Jerome Powell told the Senate Banking Committed that it was “essential” to bring inflation lower and the Fed would be looking for “compelling evidence” that inflation is slowing in the coming months. Powell also noted that the Fed did not “need to provoke a recession” but that it was “a possibility” and that achieving a soft landing would be “very challenging.” His commentary along with other Fed speakers in recent days suggest to us the case for another 75bps hike in July remains sound.
  • Inflation in the UK rose by 9.1% y/y in May, roughly in line with market expectations and up from 9% recorded a month earlier. On a monthly basis, CPI inflation rose by 0.7% from April. Core CPI, stripping out food and energy prices, rose by 5.9% y/y. Food, clothing, general spending and hospitality spending were the big drivers of the gains in inflation last month with food prices up almost 9% y/y while transport costs rose by 14% y/y. The price gains were roughly in line with the trend seen over the last few months and while prices didn’t accelerate substantially on a monthly basis, they are nevertheless still enormously elevated, with the CPI at its highest level since 1982.
  • In South Africa, inflation also picked up in May, rising by 6.5% y/y compared with 5.9% previously. CPI rose by the highest amount since 2017 and was well ahead of market expectations. Price gains were widespread with non-durables rising by more than 11% y/y in May. The South African Reserve Bank has already hiked the repo rate by 75bps so far this year, bringing policy rates up to 4.75%, and may need to extend hikes further to get inflation back into the SARB’s 3-6% target range.
  • Inflation in Canada accelerated to 7.7% in May, up sharply from 6.8% recorded a month earlier and much faster than market expectations. The Bank of Canada has already adjusted policy by making aggressive moves and we’d expect further large hikes to follow this year.
  • Dubai’s CPI accelerated to 4.7% y/y in May from 4.6% in April, but on a m/m basis, inflation slowed to 0.1% in May, the smallest monthly increase since January.  However, May appears to have been a low survey month, with no change in prices recorded for clothing and footwear, healthcare, communication, education or insurance and financial services.  Food prices rose 0.8% m/m and 8.5% y/y in May.  Housing costs increased 0.2% m/m but were still down -0.7% y/y.  Transport costs fell -1.0% m/m but were up 27.2% y/y.  We expect inflation to slow later in the year on higher base effects, provided there is no further spike higher in petrol or food prices. Housing is likely to contribute positively to inflation in H2 2022, however.
  • The ruler of Kuwait has dissolved parliament and will call new elections to overcome legislative deadlock in the country. Elections were last held 18 months ago but failed to make headway on passing legislation such as a debt law or new rules on being able to access Kuwait’s sovereign wealth fund.

Today’s Economic Data and Events

  • 11:15 FR comp PMI June: forecast 55.9
  • 11:20 ID Bank Indonesia policy decision: forecast 3.5%
  • 11:30 GE comp PMI June: forecast 53
  • 12:00 EC comp PMI June: forecast 54
  • 12:30 UK comp PMI June: forecast 52.4
  • 15:00 TU One-week repo rate: forecast 14%
  • 16:30 US Initial jobless claims June 18
  • 17:45 US comp PMI June forecast: 52.8

Fixed Income

  • US Treasuries rallied overnight as markets switch their focus to the risk of a US recession and the probability that the Fed will need to provide accommodative policy at some point over the next 12-24 months. Yields on the front end of the curve fell 14bps to 3.0559% while the 10yr yield fell by 12bps to 3.1561%. Expectations for where rates will end 2022 have also started to move lower.
  • The story was similar in European bond markets with a strong rally in bunds. Yields on the 10yr bund fell almost 14bps to 1.628% while the 10yr gilt yield dropped almost 16bps to 2.495%.
  • Emerging market bonds generally caught a bid with South African yields down by almost 6bps to 10.539% even as inflation came in hotter than expected. Indian bonds also rallied with the 10yr adding 0.6%.
  • Oman has issued an offer to buy some of its existing bonds as high oil prices and revenues help to provide Oman with some more fiscal flexibility to reduce its debt burden.


  • With markets now squarely focusing on recession risks rather than inflation, the outlook for currency markets is more mixed. The dollar sank overnight as major peers rallied, even as economies such as the Eurozone would still be at risk of contraction this year. EURUSD rallied by 0.3% to 1.0566 while USDJPY dropped by 0.23% to 136.26. GBPUSD was roughly steady at 1.2266.
  • Commodity currencies were weaker across the board, however, with USDCAD up by 0.19% to 1.2946 even after the hot May CPI print (up by 7.7% y/y) raised the prospects of the Bank of Canada needing to respond more aggressively. AUDUSD fell by 0.6% to 0.6927 while NZDUSD fell by 0.7% to 0.6285.


  • Equity markets resumed their sell-off yesterday. In the US, The S&P 500 lost -0.1% while both the Dow Jones and the NASDAQ dropped -0.2%. In Europe, the FTSE 100 closed down -0.9% and the DAX -1.1%.
  • Locally, the DFM ended the day -0.9% lower, the ADX -1.9% and the Tadawul -2.9%.


  • All markets will be on the lookout for recession indicators and commodities were no different overnight. Brent futures fell by 2.5% to USD 111.74/b while WTI dropped more than 4% to USD 106.19/b. Numbers from the API reported a build in US crude stocks of 5.6m bbl last week along with a decent increase in gasoline stockpiles, up by 1.2m bbl. Official numbers from the EIA will be released one day later than usual thanks to a public holiday at the start of the week.
  • Weakness in commodities stretched into industrial metals as well with copper prices down 2.5% to USD 8,773/tonne and aluminum on the LME off by 2% to USD 2,479.50/tonne. Iron ore continues to edge lower, down by 1.5% overnight to USD 127/tonne.

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