UK consumer price inflation fell more than expected last month, according to data from the Office for National Statistics. CPI rose by 3.9% annually in November, a sharp drop from 4.6% the month before. The surprise falloff in inflation will increase pressure on the Bank of England in the New Year to begin cutting interest rates and comes after the Federal Reserve sparked a market rally by hinting of 75 basis points of cuts in 2024.
CPI's recent peak was 11.1% in October 2022. Core consumer prices, which exclude energy, food, alcohol and tobacco, rose 5.1% annually, coming in below market expectations of a 5.6% rise, Alliance News reports.
Bank of England: Not Pivoting (Yet)
Last week the Bank of England, while seeing inflation go in the right direction, remained cautious, saying there are signs of “inflation persistence” in some areas like services and wages. There was no suggestion for any timescale for rate cuts.
“Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.”
While six members of the MPC voted for no change in rates, three still backed an increase. At the last BoE meeting of the year, interest rates were held at 5.25%.
Here’s some reaction to today’s data release.
Speed of Inflation's Fall is Encouraging
Michael Field, European market strategist, Morningstar:
“Although the magnitude of the fall in inflation is something to be celebrated, particularly by hard-pressed consumers, the fact of the matter is that these same consumers have been stretched by the levels of inflation we have seen over the last two years. Even over the last 12 months, the prices of food, alcohol, and tobacco have all risen by more than 10%, and the cost of restaurants and hotels was not far off this mark at almost 8%.
“The level of inflation in the UK remains above that in the Eurozone, and more importantly, is still some way off the Bank of England’s 2% targeted level. However, what investors will undoubtedly be excited about is the direction of travel and the speed at which we are getting there. Although there is still a danger of inflation resurfacing in 2024, today’s release will certainly focus the Bank of England members’ minds on rate cuts.”
Core Inflation Remains High
Rachel Winter, partner at Killik & Co, said: “Another fall in inflation will be heartening to investors as it signals a return to economic stability. Steadier prices allow companies and investors to plan for the long term, boosting market confidence as we head towards 2024.
“Whilst this news is positive, we are not out of the woods yet. Prices remain high and the cost-of-living crisis is still a present struggle for many. Likewise, core inflation, a metric watched closely by rate setters, isn’t falling as fast as one would hope, a fact that might have contributed to Andrew Bailey’s comments last week which alluded to potential further rate hikes next year."
Don't Expect Rate Cuts Yet
Rob Morgan, chief investment analyst at Charles Stanley said:
“We can expect the Bank to continue to talk tough as it pushes back on the view that price rises are well under control and its job is close to finished. Overall, it’s likely interest rates will remain in restrictive territory for most of 2024, but an initial cut in the second or third quarter is a strong possibility.”
Food Inflation Still Painful
James McManus, chief investment officer at Nutmeg:
“Headline inflation needs to halve yet again, if it’s to get close to the Bank of England’s elusive 2% target. And the drop from 4% to 2% could be tougher to achieve than the bigger drop we’ve already seen, given some of the more sticky elements.
“While energy prices are well below last year’s levels, food prices, which have slowed according to today’s data, are still 9% higher than a year ago. So food inflation – perhaps one we all feel most acutely in our weekly shops or eating out bills – still needs to come down dramatically.”
Doves Will Feel Vindicated
Daniel Mahoney, UK economist at Handelsbanken:
"Since last week, markets have been pricing in aggressive interest rate cuts over the next twelve months. November's print for CPI coming in considerably below expectations will surely reinforce the view of market participants that 2024 will see a number of interest rate cuts."
