UK inflation slows sharply, boosting BOE and PM Sunak
BRITISH inflation cooled more than expected in October amid a year-on-year drop in household energy prices and a wider softening of price pressures, offering relief to the Bank of England (BOE) and Prime Minister Rishi Sunak.
Annual consumer price inflation (CPI) plunged to a lower-than-expected 4.6 per cent from 6.7 per cent in September, official data showed.
The increase was the smallest in two years and prompted investors to increase their bets on BOE rate cuts next year.
“Now we are beginning to win the battle against inflation we can move to the next part of our economic plan, which is the long-term growth of the British economy,” Chancellor of the Exchequer Jeremy Hunt said.
He is expected to offer investment incentives to businesses in a budget update on Nov 22.
The BOE’s forecasts and the consensus from a Reuters poll of economists had pointed to an October reading of 4.8 per cent.
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The Office of National Statistics said the change in the annual CPI rate was the biggest month-on-month fall since April 1992.
Sterling fell slightly against the US dollar after publication of the data, which showed key inflation measures watched closely by the BOE are also slowing by more than expected. The FTSE 100 rose by more than 1 per cent to its highest level in nearly a month. The mid-cap FTSE 250 hit a two-month high.
Although inflation has more than halved from its October 2022 peak of 11.1 per cent, the BOE has warned that the “last mile” of getting it down will be tougher. The central bank has forecast that inflation will return to its 2 per cent target only in late 2025, though many economists say it will happen sooner.
With Britain’s economy now stagnant, the inflation figures reinforced expectations that the BOE’s rate-hiking cycle has ended, with the US Federal Reserve and European Central Bank also seemingly having reached the peak for interest rates.
“The UK economy is still very much facing stagflation and, in our view, the road ahead will likely continue to be bumpy,” said Julien Lafargue, chief market strategist at Barclays Private Bank. He predicted that there would be no BOE rate changes for a few months.
Core inflation, which strips out energy and food prices, fell to 5.7 per cent from 6.1 per cent, while service sector inflation also fell by more than the central bank had expected, to 6.6 per cent from 6.9 per cent.
The data represented some rare welcome news for Sunak, who had promised to halve price growth this year before an expected 2024 election that opinion polls show his Conservative Party is likely to lose.
“In January, I made halving inflation this year my top priority. Today, we have delivered on that pledge,” Sunak said on social media platform X.
The National Institute of Economic and Social Research, a think tank, said the BOE’s interest rate hikes and moves in energy prices were the reasons for the drop in CPI, adding it was not the government’s job to control inflation.
“It would therefore be helpful to move the narrative away from this halving objective, and back towards the (BOE’s) 2 per cent target,” it said.
Despite the sharp fall in inflation last month, Britain retains the highest rate of consumer price growth among Group of Seven nations, coming in narrowly above France’s 4.5 per cent.
Consumer prices in Britain have increased 21 per cent since the end of 2020, as bad a record as it gets in Western Europe.
On Tuesday, US inflation data also came in weaker than expected, sparking a rally in government bond prices and sending other major global currencies higher against the US dollar, including the pound.
BOE chief economist Huw Pill said on Tuesday that the expected fall in inflation to just under 5 per cent would still leave it “much too high”.
The central bank has sought to stress that it is nowhere near cutting interest rates from their 15-year peak, even as the economy flatlines close to a recession.
“The case against any further rate hikes is increasingly clear, but significantly more evidence will be required before rate cuts can start to be considered,” said Hugh Gimber, global market strategist at JP Morgan Asset Management.
“The tightness of the labour market remains the key concern.”
Investors added to their bets on BOE rate cuts next year, with three reductions of 25 basis points each in Bank Rate almost fully priced in by December 2024, and a first cut fully seen in June.
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