Inflation to remain sticky before interest rates call
Inflation is expected to remain stubbornly high in fresh data to be released on Wednesday, adding greater scrutiny to the Bank of England’s upcoming interest rates decision.
Price growth is set to remain at 3.5 per cent in the year to November, a slight fall from the month before, according to consensus established by Trading Economics.
Year-on-year core inflation, which excludes volatile items such as food and energy is set to remain at 3.4 per cent.
Services inflation could jump to 4.6 per cent from the previous month’s figure of 4.5 per cent, according to Deutsche bank.
The official data publication is set to come a day before the Bank of England’s policymakers reach a decision on whether to cut interest rates.
Bank of England on inflation watch
Traders have priced in a 25 basis point cut, with Governor Andrew Bailey expected to make the final call in a close debate between doves and hawks.
In the last meeting, Bailey said he would wait for more economics data to be published before making a judgment on whether to cut interest rates, adding to the significance of Wednesday’s inflation data release.
Since then, it has been revealed the UK economy contracted in October while surveys have pointed to a continued decline in the jobs market.
The Budget has also since taken place, with deputy governor Clare Lombardelli suggesting that Rachel Reeves’ policies will strip 0.5 percentage points off headline inflation from April.
James Smith, UK economist at ING, suggested those voting for interest rates to be held would be closely looking out for changes in food price growth given it could weigh more heavily on consumer expectations.
Bank officials remain ‘divided’
He said the Bank’s next move was “more uncertain” should it decide to cut interest rates this Thursday.
“The fact that the committee is this divided means that it only takes one or two officials to shift their view to completely reshape the pace of rate cuts,” Smith said.
“We think it will become more apparent over the coming months that the UK is becoming less of an inflation outlier.”
Economists at Pantheon Macroeconomics said “stubborn” levels of inflation would prompt the Bank to adopt a more cautious tone on cutting interest rates over the next year.
In response to a recent Bank survey of firms, analysts at the consultancy said that high wage growth demands in the UK could keep inflation stickier than Bank officials hope.
“Weakening survey readings of job growth pose too big a risk for the MPC to ignore this month,” said economists Robert Wood and Elliott Jordan-Doak.
“Granted, falling jobs could drag down wage growth, but the Decision Makers Panel shows roughly the same correlation between employment and wage growth as between inflation and wage growth.”