‘At last!’: City cheers signs of UK inflation passing its peak
The City has cheered fresh figures out today that revealed this year’s historic inflation surge may have finally turned a corner.
Prices accelerated 10.7 per cent over the year to November, down from a 41-year high rate of 11.1 per cent in the previous month, according to the Office for National Statistics (ONS).
The fall was steeper than expected by analysts. Inflation is still running at around a four decade high.
Encouragingly, inflation fell to 0.4 per cent over the last month and core inflation, seen as a more accurate measure of underlying price pressures, dropped to 6.3 per cent, also below the consensus forecast.
The ONS’s figures signal the worst of the inflation drive could be coming to an end and that the rate is on course to steadily fall next year.
“At last! A clear slowing in the rate of core price rises,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.
He added the new cheery numbers indicated “the peak rate now lies firmly in the past”.
Households and businesses have been crushed by soaring prices that started to take off at the end of last year, nudged higher by supply chains wilting under the weight of a sudden burst in demand after pandemic restrictions were scrapped.
Inflation has run above BoE’s target since July 2021
Loose monetary policy also supported demand as consumers and businesses were able to borrow at record low rates until December 2021. Global energy prices climbed higher at the end of last year due to storage constraints.
Inflation was then turbocharged by Russia’s invasion of Ukraine roiling international oil and gas markets.
Wage growth has trailed far behind price rises all year, eroding Brits’ spending power at a rapid pace, prompting the likes of the Office for Budget Responsibility and Bank of England to forecast the UK will slip into a long recession steered by households cutting spending.
In fact, the OBR reckons Brits are on course to suffer the steepest drop in living standards on record at 7.1 per cent over the next two years.
Chancellor Jeremy Hunt said: “Getting inflation down so people’s wages go further is my top priority.”
Analysts said factors driving inflation have now clearly unwound.
“Goods inflationary pressures, a lot of which are driven by global trends, [have] already peaked,” Paul Dales, chief UK economist at Capital Economics, said, adding oil price, which surged this year pushing petrol prices higher, rises may be tamed by February.
Hunt’s decision to extend the energy price cap of £2,500 beyond April will also prevent inflation suddenly jumping higher that month.
Signs of inflation passing its peak raises the chances of the Bank of England opting for a smaller 50 basis point interest rate rise tomorrow, the City is betting.
Some had wagered a hot GDP print on Monday and persistently strong private sector wage growth could convince Andrew Bailey and the rest of the monetary policy committee to repeat November’s 75 basis point rise, which was the steepest in 33 years.
However, “there does not appear to be anything in the inflation data to suggest the committee needs to continue with rate rises at such a pace,” Martin Beck, chief economic adviser to the EY Item Club, said.
Bailey and co have tightened borrowing costs eight times in a row to three per cent – the highest since October 2008 – in response to inflation climbing to more than five times their two per cent target.
Despite positive inflation numbers, experts warned of signs that price pressures are beginning to switch from being driven by international factors to domestic dynamics.
The National Institute of Social and Economic Research’s trimmed inflation tracker, which removes products often subjected to volatile price movements, hit a record high of nine per cent in November.
Dales also cautioned that elevated services inflation, which held at 6.3 per cent, could stick around for some time due to firms having to keep prices higher to offset wage rises.
“There is a lot of uncertainty about how fast [inflation] will fall and whether it will settle at or above the two per cent target. We think it will still be around four per cent by the end of next year,” he said.
The retail price index – used to upgrade payments on inflation linked government debt – came in at 14 per cent last month.