Charts of the Week: UK Inflation Beats While Corporate Profits Rise in Europe
- By Matthew Tibble
- 6 min read
Summary
- UK inflation beats expectations, with a surprise in core and headline.
- In Europe, corporate profits are rising.
- The latest Fed SEP shows it is now more concerned about employment than inflation.
- Elevated inventories and increased production from sanctioned countries are preventing the oil price from rising.
UK Inflation Puts BoE in Hot Water
UK headline (+8.7% YoY) and core (+7.1% YoY) inflation beat consensus expectations by +0.3ppt.
As a result, the May MPR forecasts are looking very stale (Chart 1). The gap between actual and MPR monthly forecasts widened to 0.4ppt in May, from 0.3ppt in April. Meanwhile, the +0.7% MoM core reading presented a continued strong beat of typical monthly values (Chart 2). This is a broad-based problem for the BoE.
European Firms Defend Profit Margins Against Inflation
Corporate data suggests profits are rising. For companies within the FTSE-350 (the 350 largest companies on the London Stock Exchange) earnings before interest and tax (EBIT) margins rose sharply above their previous historic average in 2022 and have continued to rise in 2023 (Chart 3). The effect is even stronger among firms in the FTSE-100.
Meanwhile, Eurozone big companies (EuroStoxx-600) saw a rise post-COVID, but the EBIT margin appears to have levelled off in Q1 2023 (Chart 4).
Fed Now More Focused on Employment Than Inflation
The Fed SEP has been accommodating progressively higher levels of inflation, while forecasting unemployment to remain near cycle lows (Chart 5). The Fed has now lifted its forecast for end-2023 core PCE to 3.9%, almost twice as high as its inflation target! These forecasts speak louder than Fedspeak or dots about the respective weights given to the employment and inflation parts of the Fed mandate.
Bottom line, a dovish central bank is not one that never raises interest rates but rather is a central bank that requires overwhelming evidence that its policies are not working to step up its inflation fight.
Why Is Oil Not Higher?
Recent OPEC+ cuts and positive revisions to global demand forecasts imply a rise in the oil price. So why is that not happening? We see two reasons: elevated inventories and increased Iranian and Venezuelan production (Charts 6 and 7).
