By Gavekal Capital Blog
Today's CPI release by the U.K.'s statistical service prompted more than a few versions of the following chart, insinuating that the precipitous drop in the GBP is going to drive prices sharply higher:
While inflation is undoubtedly trending up from near zero last year, we would take a slightly less dramatic view of the situation. Looking at a simple diffusion index, we find that just nine of the 39 sub-components (i.e., less than one quarter) of the U.K.'s consumer price index rose in September compared to the same month a year ago. While the average number of variables rising each month over the last two decades is about 15, intense spikes in prices have typically been accompanied by rises in two-thirds or more of the sub-components.
Taking a closer look at the twelve main components of the index, we can see that the largest contributor to the rise in the annual change in prices in September was the restaurant and hotels category, followed by transport and education. Contributions from the food and non-alcoholic beverages, as well as the furniture and household goods categories were negative for the month.
The biggest change in contribution, however, resulted from a shift in the transport category. Here, we take the difference in the contribution of each variable versus its contribution a year ago. The otherwise mild rise in transport costs in September stands out here because of how negative it was one year ago.
In the transport category, prices associated with the operation of personal transport equipment (i.e., fuel costs) is the only component rising steadily over the last year.
It would make sense, then, that investors betting on a sharp rise in oil prices would expect to see a similar trend in U.K. consumer prices. As we noted earlier today, though, the widespread effects of a downside breakout in CNY would seem to imply that oil prices are a bit off-sides here and are more likely to decline than rise, if longer-term trends hold.
All in all, while inflation is certainly not something to ignore, we would caution against panicking at this point.