In this month's market commentary, Mike Bell examines the headlines of two key UK data releases: rising inflation and a seemingly stabilising labour market. Digging beneath the overall picture, Mike reveals why both findings may point to a tougher road ahead.
With energy and food price pressures increasing, what is the Bank of England likely to do next?
There have been a couple of important data releases recently in the UK. Inflation's picked up, and at the headline it looks like the labour market's stabilising. I wanted to take the chance today to dig into those in a little bit more detail. Let's start with inflation. In September, UK inflation rose from 3.1% in August to 3.5% year-on-year.
It was driven mainly by an increase in petrol and diesel prices. What's the outlook from here though? Unfortunately, it looks like inflation is going to go quite a bit higher. Because of the war in Iran, it's not just petrol and diesel prices that have gone higher, but natural gas prices have moved quite a lot higher too. That just hasn't yet fed through into the official CPI data because of the way the energy price cap works. It's likely to come through with a big increase in energy bills in January next year.
You've also got food. Traditionally, when diesel prices rise, it feeds through with a bit of a lag into higher food prices. At the moment, food inflation is actually pretty low in the UK, although it obviously has risen a lot over the last few years. On a year-on-year basis, food prices have not been rising that much. But it looks unfortunately like food is going to pick up over the coming months because of those higher diesel prices, which feed through into higher tractor fuel, and of course just the cost of transporting food from the farms to the shops.
Also, we've had scorched fields over the summer, and what looks like the strongest El Niño on record brewing, which could disrupt food prices and put upward pressure on prices over the coming months. Sadly, it looks like headline inflation in the UK could well be north of 4% by early next year. What should the Bank of England do about all of this?
They need to think about the labour market, and the headline data suggests that the UK labour market's stabilising. Dig a little deeper and what you see is that actually the job gains in the UK are coming in the education sector, which doesn't really tell you very much about the health of the underlying economy, and in admin and agency workers.
Now, last month it looked like there was strong admin and agency worker growth too, but that then got revised away in the latest data. I would take that increase with quite a big pinch of salt. Unfortunately, when you look at the other sectors, some of the key private sectors in the economy, things like retail continue to shed jobs. You're also seeing continued job losses in manufacturing and tech.
Whilst in the latest data print, it looked like you got a pick-up in hospitality hiring, it was really just being caused by a distortion to the seasonal adjustment. As you can see on the chart, hospitality employment in September was actually quite a lot weaker than last September. It's just the seasonal adjustment to do with the fact that hospitality hiring has actually been weak across the whole summer compared with last year, that makes it look like it was better when really, it wasn't.
The truth of the matter is, despite the headlines, the UK labour market remains pretty weak, and UK inflation is picking up and looks like it's going to rise further. That creates a tricky situation for the Bank of England where they've got to weigh a weak labour market with rising inflation. My best guess is that they will reluctantly hike rates a couple of times but not by as much as is priced. If you want to discuss this in more detail, please reach out to your RBC BlueBay contact. I look forward to discussing with you in the future.
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