Steady inflation should not set alarm bells ringing at the Bank of England — yet
After the excitement of August’s surprise drop in inflation, September’s figures cannot help but feel a bit disappointing.
In September, inflation remained stuck at 6.7 per cent, slightly higher than economists had expected. The core inflation reading — which strips out volatile components such as food and energy — only dropped to 6.1 per cent.
The data showed that rising fuel costs as well as sticky services inflation put upward pressure on prices, helping to offset healthy falls in food and drink prices.
But the figures are disappointing rather than catastrophic, and most economists think that inflation will fall sharply next month.
For a start, economists think the reduction in Ofgem’s price cap, which came into force at the beginning of October, will help bring the headline rate of inflation down to around five per cent next month.
As Martin Beck at the EY Item Club explained, “a seven per cent month-on-month cut in household energy bills in October, reflecting the reduction in Ofgem’s energy price cap, versus a 27 per cent rise in October 2022, should knock over a percentage point off the CPI measure that month.”
Producer price inputs also fell for the fourth month in a row which will help to ease cost pressures for a number of goods manufacturers over the coming months.
Combined with yesterday’s slight easing in wage growth, this creates a fairly compelling picture that inflation is slowly but surely going to fall.
However, there are a few causes for concern.
Analysts at Investec noted “the MPC is still likely to be concerned over September’s rise in services price inflation”.
Service inflation includes categories like education, hospitality and entertainment. MPC members have highlighted the category as a crucial indicator of inflationary persistence given the dominance of the UK’s service sector.
Having dropped from 7.4 per cent to 6.8 per cent last month, services inflation picked up again to 6.9 per cent.
This is unlikely to be enough to prompt the Bank to hike interest rates again though. Paul Dales, chief UK economist at Capital Economics, said the uptick was not “too much of a blow” as the rate of services inflation remains below the seven per cent projected in the Bank of England’s August forecasts.
Rising fuel costs on the other hand could act as a greater obstacle to inflation’s descent. This month the rise in oil and gas prices contributed to transport prices rising 0.7 per cent following three months of deflation.
The path of fuel prices is unpredictable, given how much it depends on geopolitical events. “The new risk”, Dales said, “is that events in the Middle East restrain how far inflation falls next year.”
Despite the uncertainty one thing seems clear: it will be a long hard slog to bring inflation all the way down to two per cent. The Bank of England is unlikely to hike interest rates again at its next meeting, but rate cuts look a long way off.